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  • Writer's pictureTed Ohashi

How does Canopy's offer to buy Acreage change the outlook for Canadian cannabis stocks?

QUESTION: Canopy Growth’s (NYSE: CGC) (TSX: WEED) offer for US multi-state operator Acreage Holdings (CSE: ACRG.U) carried not the just the right, but the obligation, to buy ACRG once cannabis is federally legal in the U.S. (see Breaking & Corporate News below for more details):

  1. Does this change your outlook on Canadian LP stocks? Even if Liberals lose the election, Canadian LPs don’t need to justify market caps if they can access the much larger US market.

  2. Does this change your outlook on US cannabis stocks? Did US multi-state operators (MSO) just become more attractive?

  3. What do you make of a Canopy-Acreage marriage? It seems like a behemoth of a company, with a head start in every major world market and outstanding management on both sides.

R. from San Francisco, California

ANSWER: Let me begin by clarifying my position on the cannabis stocks at this time. I am concerned that if the Conservatives form the next government in the October 21, 2019 election, it will cast a pall of uncertainty over the cannabis industry and the related stocks.

Not only that the history in Canada is you have to really screw up to win only one election in succession. So if the Conservatives win, they are probably looking at forming government for eight years. In the last election, the Conservatives were almost fanatically anti-cannabis. So they cannot undo what has been done but they can slow progress or bring it to a grinding halt. This would be bad for investors exposed to Canada and sad for Canada that is considered a cannabis industry leader in the world.

It is also why Canopy Growth should be a core position in growth portfolios. You should never lose sight of Bruce Linton and WEED’s ability to pull rabbits out of hats. Having said this, here is the proviso. When Canopy/Constellation did their initial transaction in 2017, it stimulated a huge rally in the cannabis stock market. The second Canopy/Constellation transaction 2018 resulted in an important recovery rally in cannabis stocks but less vigorous than the first. Don’t be surprised if a rally following the Canopy/Acreage transaction is more about Canopy and less about the rest of the cannabis stocks.

The Constellation transactions brought the potential that similar cross-industry investments could happen for other companies large and small. This transaction is about Canopy solidifying its position at the top. I think it might prompt a limited positive response.

Here are my answers to your questions: 1. No! 2. No! 3. Yes!

  1. No, it doesn’t changed my outlook for Canadian Licensed Producer shares. It isn’t lost on me that WEED went shopping in the U.S. and not Canada. You might say I am on the same page as WEED. The Canadian LPs have been able to finagle their way around the Toronto Stock Exchange (TSX) restrictions before. Canopy might have had a unique problem because of its relationship with Constellation Brands. In fact, I was exchanging ideas with an investment advisor friend of mine when word was out but neither of us had seen the details and we were wondering if WEED was going to bypass the TSX and just buy Acreage. At this point, you could argue the TSX needs WEED more than WEED needs the TSX.

  2. No, it doesn’t change my outlook for U.S. cannabis stocks. But it does in a sense because it strengthens it. I still prefer the U.S. and international economies for cannabis investment over Canada. The fact that WEED stepped up to the bar doesn’t really make me believe the MSO’s are more valuable. I already thought they were valuable. But don’t get me wrong. I think this will trigger a rally in U.S. cannabis stocks and MSOs in particular.

  3. I agree with you. I think this transaction ensures that WEED will be the leading cannabis company in the world for the foreseeable future.

In your question, you point out that Canopy has the right and the obligation to buy Acreage Holdings. My guess is if there were no legal and regulatory considerations holding them back, Canopy would have simply bought Acreage.

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