President Trump recently suggested that his administration is taking a closer look at legalizing cannabis at the federal level, moving beyond merely letting the states decide what’s right. Such a move would be good for Canopy Growth (NYSE:CGC), CGC stock and most importantly, the president’s reelection hopes in 2020.
First, before I get into the heart of the matter, let me remind readers that this isn’t a political dissertation, it’s an investment piece. I could care less whether Trump thinks legalizing at the federal level is a vote-getter, which it is because I’m Canadian. I have no dog in this fight, politically or philosophically.
Instead, I’m interested in what this would do for the U.S. cannabis industry, on a general level, and for Canopy Growth, more specifically.
Let me address both.
What Federal Legalization Means
One only needs to read the comments after an article on the subject to know that most Americans are supportive of federally legalized cannabis.
“That’s [Trump’s comments] signalling to the rest of his Republicans that you know what, it’s basically okay to have a view around cannabis. The reason he is doing it is because in the United States 95 per cent of the country believes in medical cannabis, and 66 per cent believe in adult-use or recreational cannabis,” said Acreage Holdings (OTCMKTS:ACRGF) CEO Kevin Murphy recently.
Just 11 states and the District of Columbia have legalized recreational pot. A total of 33 have legalized medical marijuana. That leaves 39 states where recreational cannabis is illegal and another 17 states that don’t allow medical marijuana.
Under the current situation, pot can’t be transported across state lines because cannabis isn’t legal at the federal level. This means that if you want to sell in Colorado, you’ve got to make it in Colorado or buy it from a grower that does.
State politicians love this set-up because it means local jobs, taxes, etc.
However, in a country of 325 million, it’s an incredibly inefficient way to operate an industry. Could you imagine if a company like Wayfair (NYSE:W) had to live by the same rules? It can’t make money as it is, and it’s got one of the best logistics systems in retail.
Here in Canada, we used to have similar rules in the beer business.
Up until 1992, if you wanted to sell beer in Ontario, it had to be made in Ontario. That meant breweries were operating in every province in the country, including Prince Edward Island, which had a population of 130,827 at the time.
The Canadian government finally came to its senses and removed those trade barriers.
Well, you would think someone who is opposed to government regulations and red tape as Trump is, would see the inefficiencies of a system left up to the individual states.
Why should a state like California, whose population is greater than all of Canada, not be able to provide California-grown pot to people living in Rhode Island? If it is a quality product at a reasonable price, you would think “Businessman” Trump would be all over that.
I can see how raising the federal minimum wage would rankle some states used to operating lower-wage economies, but failing to legalize pot at the federal level is terrible business.
Were the Republicans or Democrats to push for legalizing pot at the federal level — a process that isn’t nearly as easy as it seems — before the November 2020 election, I believe that this move would motivate a lot of younger voters to get out to cast their ballot.
Economically, it would be a boon to all stakeholders.
How CGC Benefits
As you might be aware, Canopy has a tentative deal in place to buy Acreage Holdings for $3.4 billion, but only if the production and sale of cannabis become federally legal. Further, the agreement has a seven-year window before the right to buy the company expires.
For this right, Acreage shareholders received an immediate $300 million ($2.55 a share) cash payment as an incentive to wait for federal legalization.
In the meantime, Acreage has licenses to produce cannabis in 20 states, 87 dispensaries and 22 cultivation and processing sites. It’s a going concern that will continue to grow its business in the U.S. with Canopy lending its expertise, both in terms of growing the stuff, distributing it and building a wider audience.
With Bruce Linton having left the company and a CEO search underway, it’s a good thing that the Republicans haven’t been talking up legalization because the company’s controlling shareholder, Constellation Brands (NYSE:STZ), is still ensuring Canopy’s ducks are all in a row.
The fact that Trump’s open to discussing the idea means a CEO hire is probably going to happen sooner rather than later. In the meantime, interim CEO Mark Zekulin is more than capable of running the show.
The company’s Sept. 4 presentation at the Barclays 2019 Global Consumer Staples Conference stated that Canopy could reach a revenue run rate of C$1 billion in the fourth quarter with its gross margin 40% or higher.
Between the second-phase of Canadian legalization (edibles, infused drinks, concentrates), increasing its Canadian distribution at the retail level, international expansion outside North America, and of course, its U.S. push, which includes Acreage, hemp-related sales, etc., the new CEO is going to have their hands full.
So, maybe, finding the right person isn’t going to happen overnight after all.
What I do know is that CCG benefits greatly from federally legalized cannabis. I’m sure the lobbying is going to intensify in the months leading up to the election.
The Bottom Line on CGC Stock
I believe that Canopy Growth is one of the best Canadian cannabis stocks available. However, to become a global player, it needs to be a part of the U.S. marketplace. The Acreage deal makes that a reality.
Federal legalization is coming, but it can’t get here fast enough.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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