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Canopy Growth (CGC) May Never Reap the Benefits of Acreage Holdings

support@smarteranalyst.com (Ben Mahaney)

The market has been operating under the assumption there is no doubt Canopy Growth's (CGC) acquisition of Acreage Holdings is sure to enjoy the benefits of the U.S. government legalizing recreational pot.

I've seen some people even suggest it could happen as soon as a year from now. In my opinion that outlook has no basis in reality. There's a reason, after all, the deal will expire after seven and a half years if it isn't consummated.

This implies the participants, at best, believe it's going to take some time for legalization to transpire. It also points to the possibility it may take a long time to be legalized, if it ever is.

Canada and the U.S

One of the problems as I see it is far too many people are equating the fairly easy legalization of recreational pot in Canada with the U.S. The assumption appears to be that the U.S. will rapidly follow in Canada's footsteps. The problem there is people aren't thinking deeper about what differentiates the two countries, and how difficult it'll be to gain acceptance of adult-usage pot in America.

While the U.S. and Canada have some similarities, the underlying differences concerning social issues are vastly different, especially with conservatives in the U.S., which number in the multi-millions. Even among liberals there is some hesitancy in recreational legalizing pot.

As with the last presidential election, the media and many polling agencies got it significantly wrong about Trump and his support among millions of Americans. I think it's the same with pot legalization. If and when a push is made for legalization, I think there will be a groundswell of grass roots resistance that will make it politically dangerous for many politicians to support.

One thing to understand about the U.S. if you're not a resident, is there's a point-of-view that is represented by business and media elites living on the East and West coasts, against the outlook on life by those that live in what we identify as "flyover" country.

In recent year this has resulted in a distortion of what the American people really believe. As it relates to legalization of recreational pot, I think it's highly unlikely there will be a change in sentiment that would make legalization happen at the federal level.

A key there is it's believed by many that recreational pot is a gateway drug to more potent drugs. It would at best, take years to change the minds of Americans concerning that. I think the deal will be forced to expire before recreational marijuana is legalized in the U.S.

Most likely U.S. cannabis scenario

What I think will probably play out in America is there will be a full legalization of cannabis, but it'll be on a state-by-state basis, and only on the medical side of the business. It would surprise me if all 50 states don't legalize medical marijuana.

My reason for thinking that is medical cannabis, now with a growing body of research and proven results, is becoming more acceptable to a growing number of people. Educating the public on the benefits has been a key to that changing outlook.

The general population also starting to understand the difference between THC (part of cannabis that makes people high) and CBD is important. That's why it was fairly easy to pass the 2018 Farm Bill.

Another factor is many states in the U.S. are struggling under pension pressures, and they need more tax revenue to sustain them. The fast-growing CBD and medical pot market fits well into meeting those and other needs of the states.

Conclusion

A lot of media reporting on the Canopy Growth and Acreage Holdings deal has been based upon the assumption recreational pot will inevitably be legalized in the U.S., and in many cases, it's suggested it'll be sooner rather than later.

While I understand, from the point of view of a Canadian-based company, that the U.S. is the most desirable international market, but it is highly unlikely the federal government will legalize recreational pot in the near future, if it ever does.

For that reason, those interested in Canopy Growth shouldn't make investing decisions based upon expected results from Canopy acquiring Acreage Holdings. It would be a strong catalyst for Canopy Growth if it ever is allowed to happen, but the odds are far more against it than for it, for the reasons mentioned above.

I believe it was a mistake for Canopy to target the U.S. market at this stage of growth. Instead it should have focused more on developing a meaningful presence in Europe and some places in South America. It of course has some presence there, but it's apparent to me, such as in Germany, that it hasn't given its full and undivided attention in other global markets.

Instead, it has a headline non-deal that may never work out. I think it's a huge mistake to make an investing decision based upon the inevitability of recreational pot being legalized in the U.S. It's far from a sure thing, and if it ever does happen, I think it'll be a lot further out than the market is assuming at this time.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

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