There has been lots of excitement around Canopy Growth (CGC -10.51%) recently after the company announced it would be accelerating plans to enter the U.S. pot market (when it's legal to do so). Through the launch of Canopy USA, it will be able to hold all of its investments in U.S.-based cannabis companies.
But this could come at a serious cost to the business, and it may result in the cannabis producer getting delisted from the Nasdaq. Here's why that could happen and why it could be catastrophic for the stock.
Why would Canopy Growth get delisted?
By creating Canopy USA, Canopy Growth's ultimate goal appears to be to consolidate the results of Acreage Holdings, Wana Brands, and Jetty -- all cannabis companies that it is planning to acquire and that are separate from the business today. But due to the federal ban on marijuana in the U.S., Canopy Growth wasn't going to execute on any of those deals until the laws changed (otherwise, it would be in violation of U.S. laws and thus threaten its position on the Nasdaq). Through Canopy USA, a separate entity, however, it can exercise the right to acquire those businesses.
But legally, it would still find itself in the same position because it's debatable whether it could consolidate Canopy USA into its results. And so, while the situation may appear different, it's still very similar. Canopy Growth is effectively saving a step in creating a holding company for its U.S. investments right now as opposed to waiting for legalization. And by doing so, Canopy USA can also execute on pending deals for Acreage, Wana Brands, and Jetty.
Canopy Growth recently warned investors that the Nasdaq does object to the company's plans to consolidate the results of Canopy USA (should it acquire U.S.-based pot companies). While Canopy Growth is still in discussions with the Nasdaq, it acknowledges that it may not be able to remain on the exchange, and the NYSE may take a similar view as well. As a result, Canopy Growth could be left trading over-the-counter (OTC) in the U.S. in addition to the Toronto Stock Exchange (where it currently trades today).
Trading OTC could be bad news for investors
The problem with trading OTC is that fewer funds would hold the stock, and not as many investors would have access to Canopy Growth's stock, even if they wanted to own it. The OTC is generally associated with riskier stocks, and that can lead to less trading and lower premiums.
Over the past three years, Canopy Growth has normally traded at a healthy premium (in terms of sales) over top multi-state operators that are based in the U.S. and which trade OTC, even though they generate more in revenue and that have better growth prospects (since they're active in the U.S. market).
Data by YCharts.
The premium has shrunk over the past year as Canopy Growth's stock has taken a beating, but that could change if there's a catalyst (e.g., movement on marijuana reform) that makes pot stocks attractive buys again. However, if Canopy Growth's stock trades OTC, the premium it commands today could turn into a discount, given its lackluster sales growth.
Is Canopy Growth's stock too risky to buy right now?
Year to date, Canopy Growth's stock is down 62%, while the Horizons Marijuana Life Sciences ETF has declined by 46%. Although the cannabis producer has been rallying of late on the recent news surrounding Canopy USA and the excitement around possible marijuana reform, the stock remains deep in the red this year.
That's also true of the business itself, as Canopy Growth routinely posts losses, and sales growth is absent or simply inconsistent. Its beaten-down stock price could make it an attractive buy to some investors, but it's not an investment that would be suitable for people who are risk-averse.
Unless you're comfortable with the risk the stock possesses today and the potential that it could be years before marijuana legalization takes place in the U.S., then you're better off avoiding Canopy Growth's stock for now.
