Shares of Canopy Growth Corporation (CGC 2.41%) have rocketed higher this week, according to data from S&P Global Market Intelligence. The Canadian cannabis producer is up over 100% after Vice President Kamala Harris called for cannabis to be decriminalized as quickly as possible. Investors have taken this in stride and aggressively bought the stock.
As of 3:17 p.m. ET on Friday, March 22, shares of Canopy Growth are up 135.1% this week. Here's why.
A path to legalization in the United States?
In the State of the Union address earlier this month, President Biden discussed cannabis and said it should be on the path to legalization in the United States. Investors heard this news from the country's leader and decided to bid up cannabis stocks. After more reports came out, momentum has returned to these cannabis names, with investors bidding up stocks like Canopy Growth. It has nothing to do with any fundamental changes in the business.
Now, this week, Kamala Harris -- vice president of the United States -- said in a meeting that cannabis needs to be rescheduled from a legal perspective as soon as possible. Federal legalization in the United States would be very helpful for Canopy Growth as it would open up the floodgates for more legal selling of the drug.
It also needs a lot of help to grow. Last quarter, the company generated just $120 million in revenue and $6 million in gross profit. These razor-thin margins are troubling and need to be improved. Canopy Growth has never generated positive free cash flow.
Don't get your hopes up on one speech
Cannabis stocks are extremely volatile. They have also gone through a bubble period before. In 2018, valuations of cannabis stocks got out of hand; Canopy Growth was one of them. At one point, the stock was trading at a price of $400. Today, it is at $7 even after this big run-up.
Don't get your hopes up on one speech. Politicians have talked plenty of times about decriminalizing cannabis. Maybe this time is different, but there has been a lot of talk and minimal action from a federal perspective in legalizing the drug. Canopy Growth is also highly unprofitable. Buying shares of the stock just because the president and vice president mentioned legalization in public is not an investment thesis. Smart investors will avoid Canopy Growth and other cannabis stocks due to all this legal uncertainty and bad-business models.
