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The global cannabis industry has experienced explosive growth in recent months and everywhere investors are talking about marijuana stocks and their huge gains. The attention of marijuana investors is now entirely focused on Canada, where the legalization of cannabis for recreational purposes is expected to take place later this month. This has attracted enormous interest for Cover growth (NYSE: CGC), which has become a key cannabis producer and a potential market leader when the Canadian leisure market opens up.
There is no question that Canopy Growth presents a huge opportunity. But few question the fact that Canopy faces many risks. Indeed, the company itself has identified what it considers to be five of its major risk factors. Anyone wishing to buy shares of the Canadian Cannabis Society must understand them and have the assurance that Canopy will be able to overcome obstacles in its path.
Source of image: Canopy growth.
Do not ignore the risks of Canopy
Whenever you plan to make a new investment, it's essential to get up to date with regulatory filings with businesses. Although Canopy Growth is a Canadian company, its listing on the New York Stock Exchange requires it to comply with the disclosure rules of the US Securities and Exchange Commission. The required information includes a list of the principal risk factors that Canopy has defined as significant for its shareholders.
Canopy's latest report on its biggest risks comes from its 2018 Annual Report. The Canadian company filed this report in June, but the potential issues it identified remain important as a road map of the possible pitfalls that Canopy will have to make. face to succeed.
1. The regulation of marijuana is changing, making it difficult for Canopy.
Cannabis is highly regulated in most of the countries in which Canopy operates or seeks to operate, and the company is well aware that laws and regulations can change unexpectedly in a timely manner. Especially in the medical cannabis field, it is critical that Canopy and other marijuana growers follow the requirements of national health authorities, such as the US Food and Drug Administration and Health Canada. Otherwise, failure to obtain approvals could place Canopy at a huge competitive disadvantage that it could never recover from.
2. Canopy could face liability claims because of the products.
Marijuana companies have learned from the experience of the tobacco industry and want to avoid potential product liability litigation that has affected major cigarette manufacturers for decades. Nevertheless, Canopy recognizes that it will almost certainly be sued if "the products we manufactured caused injury or illness, including improper use instructions or improper warnings of adverse effects or interactions with patients. 'other substances'. Health advocates who oppose smoking have effectively organized anti-smoking campaigns that have resulted in a substantial reduction in the volume of tobacco sales over the years. If cannabis problems arose, Canopy and others could face a similar setback.
3. Acquisitions and collaborations could be unsuccessful.
Canopy has made numerous acquisitions to increase its production capacity and its partnership with Constellation Brands (NYSE: STZ) made him stand out from his peers. Canopy knows, however, that there can be no guarantee that it will be able to effectively integrate the acquired companies with its existing operations and that strategic alliances may not work as intended. For example, assuming that Constellation will eventually acquire Canopy, a failure could be disappointing for the shareholders of the Canadian cannabis society.
4. Future share offerings could dilute investors.
Canopy rightly notes that it may need access to more capital in the future, and that the offering of its shares could be a critical component of any capital raising effort. Often, secondary share offerings result in an immediate fall in share price as current shareholders expect to see their interests in the company diluted by the increase in the number of shares outstanding. Until now, Canopy has been able to secure debt financing to avoid dilution, but the changing business environment could make this funding too expensive for a practical financing solution.
5. Canopy's share price has been volatile and may remain volatile.
The most obvious risk that Canopy shares with all other marijuana stocks is that the infatuation of investors has resulted in tremendous volatility. Stock prices change with the smallest information – and sometimes without apparent justification. Sometimes the news can move Canopy shares, even if they only concern another company and do not really apply to Canopy. If you plan to invest in Canopy or any other marijuana stock, you must have the stomach hard to withstand the inevitable ups and downs.
Learn more about Canopy
Canopy Growth has convincingly advocated for being a leader in the nascent cannabis industry, but that is far from a sure thing. Before investing in Canopy or other marijuana stock, make sure you know as much as you can about her business and the challenges she faces.
Dan Caplinger has no position in the mentioned actions. The Motley Fool has no position in the mentioned actions. Motley Fool has a disclosure policy.
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