It's been puzzling to me to read or listen to some of the commentary associated with the deal Canopy Growth (CGC) made to acquire U.S.-based Acreage Holdings (ACRGF), based upon the assumption America will soon legalize cannabis at the federal level.
Not only is this not an inevitability, it's quite possible, at least in regard to recreational pot, that it may never happen, or at best, be many years away. I have considered this to be the worse of the moves Canopy Growth made in regard to expansion.
Understanding U.S. cannabis sentiment
After Canada legalized recreational pot in 2018, the common idea arose that the U.S. would quickly move in the same direction. The major problem there is the media and a number of pundits wrongly assumed Canadian sentiment as being the same in America. It's not.
The two countries are very different, and the sentiment of approximately half of the population is against legalizing recreational pot in any way. Senate majority leader Mitch McConnell has already stated he'll oppose any attempt to legalize recreational pot in the country.
What is more probable in the U.S. is all the states will eventually legalize medical cannabis, but many will not do the same for recreational pot. For that reason I believe medical cannabis is likely to be also legalized at the federal level, but resistance will be strong against recreational legalization. Again, I see the strong possibility it'll never be legalized in the U.S.
As the general public starts to understand cannabis better, they understand there are legitimate benefits from it, but also clearly understand, or at least believe, recreational pot isn't one of them.
Acreage Holdings shouldn't be included in a Canopy model
I've seen a lot of investors believe in the assumption it's inevitable that recreational pot will be legalized in America, and they base their Canopy Growth model upon that outlook.
The obvious problem is what I mentioned above, which is there is no way in the near future, if ever, Canopy Growth will be able to pull the trigger on Acreage Holdings. For that reason, to include the performance and future performance outlook for Acreage Holdings in Canopy Growth's numbers is a big mistake.
Even Canopy Growth management included this possibility when making the deal, as it is allowed to scrap it if nothing happens in between seven to eight years. That points to the reality that management knew there was the distinct possibility the deal would never be consummated. Investors should believe that.
Nonetheless, I keep reading or hearing in the media that while Acreage Holdings won't be a part of Canopy Growth in the next year, it's suggested it's only a matter of time before it is.
People that make those declarations do so on a faulty premise. The problem is filtering American sentiment through a Canadian spectrum. I'm repeating that because investors really need to understand that Acreage Holdings is in no way a surety concerning being able to be acquired by Canopy Growth.
It's a waste of time to me, and a risky endeavor to analyze Canopy Growth based upon it eventually being able to acquire Acreage Holdings. The more I study the deal and measure it against political sentiment in America, the more I believe the deal may never be made. Even if it is eventually made, I think it'll be many years before it happens, at best.
If it takes longer than the seven-plus years allotted per the deal, it's almost certain both companies will go their separate ways. My thought is they may make an amicable separation before that if the American market is clearly not going to include federal legalization of recreational pot.
Bottom line is investors should look at Canopy Growth based upon its existing potential, and not something that may never unfold. Also, investors need to ignore the media hype and closely examine what U.S. politicians are saying concerning opposition to legalizing recreational pot. It's not as optimistic as is being portrayed in the media and by talking heads.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Read more on CGC:
- There’s Light at the End of the Tunnel for Canopy Stock, Analyst Says
- Three Big Reveals as Jefferies Meets With Canopy Growth’s (CGC) New CFO
- Canopy Growth: What CEO’s Exit Means for the Stock
- Canopy Growth May Never Reap the Benefits of Acreage Holdings