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Washington Acrimony Hurts the Case for Canopy Growth

Among the many catalysts supporting cannabis legalization – and by logical deduction, sector-related firms like Canopy Growth (NASDAQ:CGC) – is the health argument. Though no reputable institution establishes a firm link between botanical use and therapeutic benefits, both limited medical studies and ample personal testimonials support cannabis’ potential health claims. On paper, this is a net positive for CGC stock.

Indoors marijuana growing, planting cannabis, holding it in a hand (canopy cgc stock)
Source: Shutterstock

But recently, CNN – everyone’s favorite cable news channel – played the role of killjoy, reporting that cannabis might not be as innocent as its product evangelists have claimed in the past. It printed the rather alarming paragraph:

Adults under 45 years old, who consumed cannabis within the last 30 days, suffered from nearly double the number of heart attacks than adults who didn’t use the drug, according to research published Tuesday in the Canadian Medical Association Journal.

Dr. Karim Ladha, clinician-scientist and staff anesthesiologist at St. Michael’s Hospital and the University of Toronto in Canada, heaped onto the bad news, declaring, “There’s increasing evidence that [cannabis] could potentially be harmful to you, both in the short term and the long term.”

Coincidence or not, CGC stock had a rough session on the day the CNN report came out on Sept. 8, with shares closing down nearly 6%. Of course, it would be ludicrous to blame the media for Canopy Growth’s woes. Over the trailing six months since Sept. 9, the equity unit dropped almost 51%.

Nevertheless, many are undoubtedly tempted to view the fallout in CGC stock as a discounted opportunity. According to an April 2021 report from the Pew Research Center, the headline read, “Americans overwhelmingly say marijuana should be legal for recreational or medical use.”

Theoretically, this should bode well for U.S. cannabis legalization. But I wouldn’t buy Canopy based on this thesis.

An Unfavorable Political Backdrop

To be fair, several surface-level indicators point to a much more tolerant environment for cannabis policy relative to prior generations. Therefore, it’s not totally out of the question that legalization could occur and thereby boost the profile of CGC stock.

For instance, the passing of the Agriculture Improvement Act of 2018 – colloquially known as the farm bill – confirmed that Democrats and Republicans were willing to work together on what should otherwise be a contentious issue in legalizing hemp and cannabidiol (CBD).

In addition, a growing number of states have legalized marijuana to varying degrees. With public sentiment shifting firmly in favor of acceptance, it may get to a point where it’s dangerous for politicians to deny what the constituents want.

But per a Los Angeles Times article, the chances that the current legislation on marijuana moving in the Senate actually passing are not good. Indeed, even Senate Majority Leader Charles E. Schumer, the head proponent of the bill, acknowledged that he “would need total support from Democratic senators plus at least 10 Republican votes to overcome a filibuster.”

I shouldn’t say “no chance” (but I already did in earlier cannabis articles). However, considering the broader context, I’m not holding my breath. And because of that, I wouldn’t buy CGC stock on the hopes that the U.S. will legalize marijuana.

Getting those 10 Republican votes will be a next-to-impossible challenge because the rage stemming from the novel coronavirus has every power broker and influencer dug deep into their ideological trenches. Where once there was compromise – ironically, in hemp/CBD legalization – there is nothing but bad blood.

Further, you have massive catalysts in conservative circles, with firebrand talk show host Larry Elder having a solid shot at unseating liberal California Gov. Gavin Newsom. Clearly, this is not the time for Republicans to cause disunity in their ranks.

You’re on Your Own With CGC Stock

Interestingly, if Elder manages to become the governor of California, he might surprise people by voicing support for full federal legalization. I grew up on Elder’s talking points, so I like to think I know his thought process quite well. Politically, he’s more of a laissez faire libertarian than a hardcore Republican so as far as cannabis – and vaping and other adult liberties – are concerned, I’d bet Elder is an ally.

Even then, I’m not sure if Californians are ready to unseat Newsom. While the governor has had a shaky leadership history, an argument exists that this uncertain time is not the time to rock the boat. And I believe that theme carries over onto the federal level. President Joe Biden himself is very ambivalent about approving full legalization, in my opinion due to concerns about his legacy.

Ultimately, if you’re going to invest in CGC stock, you’ve probably got to do so assuming the worst politically. In other words, you’re more dependent on the greater fool theory, which is a tough (and usually empty) road to take.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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