Despite a volatile week for cannabis specialist Canopy Growth (NASDAQ:CGC), CGC stock has enjoyed a tremendous performance over the past month, gaining about 163%. Currently, shareholders are voting on two proposals related to the creation of a U.S.-based entity called Canopy USA. Enthusiasm is running hot that the U.S. government will eventually legalize marijuana.
According to the Pew Research Center, the use and possession of marijuana is illegal under federal law. However, about three-quarters of states have legalized the substance for medical or recreational purposes. Further, the think tank notes that the “changing legal landscape has coincided with a decades-long rise in public support for legalization, which a majority of Americans now favor.”
With rising prospects for change at the federal level, Canopy shareholders are voting on whether the company should issue a special type of security called exchange shares. These shares would represent ownership in Canopy USA, a new entity that would hold all of Canopy Growth’s investments that are geared toward the U.S. market. These investments include companies like Acreage Holdings and Mountain High Products.
Favorable Dynamics Boost Sentiment for CGC Stock
According to the company’s press release on the matter, the creation of Canopy USA will allow the entire enterprise to realize value in the near term prior to any kind of federal legalization. Moreover, the move will position the company for profitable growth, potentially enabling CGC stock to sustain its recent bullishness.
To be sure, federal legalization is a complex narrative. Such a framework naturally applies some risk to CGC stock as the underlying enterprise would be committing some resources to Canopy USA (assuming shareholder approval) prior to the green light. However, some intriguing developments have materialized that could potentially help CGC.
First, Vice President Kamala Harris urged the Drug Enforcement Administration (DEA) to reschedule cannabis under the Controlled Substances Act. If marijuana is successfully rescheduled, it’s possible that more voters sitting on the fence could favor the Biden administration.
Just as importantly, former President Donald Trump may have forked himself with his tough law-and-order message. As a Democrat with certain progressive ideals, President Biden can pivot with relative ease toward cannabis legalization. However, Trump may have a more difficult time selling that message, considering his other controversial policies.
Why It Matters
Despite the tremendous run-up in CGC stock, analysts remain unconvinced. Right now, experts rate shares a consensus moderate sell. This assessment breaks down as three holds, two sells and no buys. Overall, the average price target sits at $3.78, implying more than 51% downside risk.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
