I’ve always loved the marijuana sector. Essentially, this is the first time that a black market has turned into a genuine retail market. However, recent days have harshly challenged this thesis. Case in point is oft-mentioned Canopy Growth (NYSE:CGC). Since taking off into the second half of this year, CGC stock cratered on Monday.
This was no run-of-the-mill volatility. Canopy Growth stock evaporated more than 11% of its market value. Its peers did not fare any better. Sector leader Tilray (NASDAQ:TLRY) dropped almost 16% to start this week, while Cronos Group (NASDAQ:CRON) lost more than 12%. I’m not sure which marijuana-related company wasn’t negatively impacted, if any.
As my InvestorPlace colleague Vince Martin has repeatedly warned, several cannabis stocks are simply overvalued. He cited Tilray as an extreme example, but he also sharply cross-examined CGC stock. Martin’s primary concern is that the markets have excessively baked in the enthusiasm toward Canadian weed players. Mere legality doesn’t translate to profitability.
Another problem that affects Canopy Growth stock is commoditization. If legal marijuana becomes a major mainstream market — and that’s a big if — CGC doesn’t offer any real differentiation. Let’s be real for a second: as long as a cannabis plant provides you the high or the medicinal effect you’re looking for, what does it matter from where the plant originated?
Of course, marijuana has many strains or variations that meet specific end-user preferences. It’s possible that we’ll eventually have a weed-connoisseur market. However, that might take time, and there’s nothing stopping competitors from offering highly demand strains at attractive prices.
In addition, many analysts have argued that CGC stock suffered from the obvious short trade. Canada launching legal marijuana was the perfect opportunity to dump shares.
So is Canopy Growth stock doomed?
I wouldn’t go that far.
Colorado Provides Blueprint for CGC stock
Before I dive in, let me just say for CGC stock or any cannabis-related investment: this is a completely atypical market. I absolutely guarantee that you will experience severe volatility. Marijuana in your portfolio isn’t nearly as fun as marijuana in your system …not that I would know anything about that.
However, recall what I said at the top: we’re basically witnessing a non-existent industry suddenly deliver billions of dollars. Such a radical paradigm shift creates opportunities, but it also creates incredible risk. Think of Canopy Growth stock or its peers as cryptocurrencies, and judge them on that standard.
If that’s you, read on. If not, CGC stock probably isn’t for you.
With that out of the way, I’m closely watching CGC. I expect shares to tumble further based on the reasons that Martin and other analysts have cited. Where I differ is in the thesis that cannabis has already reached peak valuation. Colorado indicates otherwise.
Within two years of the state introducing legal cannabis, retail sales totaled well over $1 billion. This year, Colorado is on pace to exceed $1.53 billion in revenue. In the next few years, it’s not unreasonable to see $2 billion annual sales or more. Weed demand just keeps rising.
Roughly speaking, Canada has 6.5 times the population of Colorado. Multiply that figure by the $1.5 billion in 2017 sales and you get the approximately $10 billion in projected peak Canadian sales.
Here’s the thing: despite Coloradans presumably becoming jaded with legal weed, they haven’t shown it. This year, every month except May experienced a year-over-year lift in cannabis sales. I genuinely believe we’re underestimating Canadians’ appetite for weed, which is a net positive for CGC stock.
Demographic Tailwinds for Canopy Growth Stock
Another counterpoint to the bears is Canada’s demographic trends. According to statistical projections, Canada will continue to grow over the next 50 years. Various forecasts suggest our northern neighbor will grow to between 40 million and 63.5 million people by 2063. Currently, Canada’s population is 36.7 million.
Based on that, the population-size boost doesn’t seem that significant. However, the experts may have underestimated these figures. President Donald Trump is putting up a wall to stop the immigration influx. On the other hand, Canada is more or less opening up its doors.
Therefore, Canopy Growth stock and its peers can ride a significant population tailwind for decades to come. And while the details need to be worked out, Canada can also eventually host cannabis tourism. That appeals to folks on our side of the earth who don’t fancy a long plane trip to Amsterdam.
Finally, don’t dismiss the idea that marijuana can shed its Schedule I status. We’re seeing a massive shift in public sentiment towards the much-maligned green plant. Even Republican and former Speaker of the House John Boehner has jumped into marijuana advocacy.
Again, CGC stock will suffer guaranteed volatility. Marijuana investment is a knife-fight in which you will get stabbed. But I must stress that I don’t buy into “the sky is falling” arguments. If you have patience and nerves of steel, even an overvalued company like Canopy can do great things.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.