The Worst Is Over for Canopy Growth Stock

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CGC stock - The Worst Is Over for Canopy Growth Stock

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The cannabis sector’s biggest catalyst in recent memory (and arguably ever) came on Oct. 17, when pot became officially legal throughout all of Canada. But pot stocks had rallied big into that catalyst, so many warned (including myself) that Oct. 17 would become a “sell the news” event. Indeed, starting on Oct. 17, all pot stocks, including standout leader Canopy Growth (NYSE:CGC), suffered from a two-week long selloff, which dropped the whole sector into bear market territory. Now, the whole sector is bouncing back. And the one pot stock trading with the most vigor is CGC stock.

That is a bullish sign. It appears as if the “sell the news” era in CGC stock is over. Fundamentals are improving with respect to the roll-out of legal cannabis in Canada, while sentiment and technicals imply this reversal is the real deal.

As such, now is time to get bullish on CGC stock again.

Canopy Growth Is Best Investment In Cannabis

I’ve said it before, and I’ll say it again: CGC stock is second to none in terms of potential cannabis investments. The company has a massive investment from major alcoholic beverage company Constellation Brands (NYSE:STZ). Canopy also spends a fair amount on R&D, and has a venture arm that is further diversifying investor exposure to the cannabis market.

The company is the unrivaled sales leader in this space and has the biggest cannabis production capacity of any publicly traded pot stock as well as the widest portfolio of brands for both recreational and medicinal purposes.

Thus, if you are looking for exposure to the cannabis market, the best way to do so is through buying CGC stock.

Valuation is always a concern for hyper-growth companies in the first inning of their multi-year growth narratives. This especially true for CGC stock, where long-term upside lacks clarity and hinges largely on global legislation. But, under reasonable market share and margin assumptions for Canopy Growth, I peg the Canadian business alone as being worth $8 billion today.

CGC stock currently has a market cap of $9 billion. Thus, in order to support the current valuation with long-term fundamentals, you need to think that the potential non-Canadian business is worth $1 billion today. That isn’t all that hard to do, considering most analysts and insiders peg the non-Canadian cannabis market at over $100 billion and nearing $200 billion.

Long story short, if you believe that Canopy Growth will emerge as the leader in what will be a huge cannabis market in Canada and grow marginally in non-Canadian markets, then the current valuation on CGC stock makes sense long-term.

Near-Term Fundamentals and Sentiment Are Improving

While the long-term fundamentals on CGC stock support the current valuation, those same fundamentals aren’t all that tangible today. Thus, CGC stock swings violently based on near-term fundamentals and sentiment.

Following the October 17 roll-out of legal weed across Canada, near-term fundamentals and sentiment were deteriorating. You had a bunch of supply problems across all of Canada, consumers were increasingly turning towards the black market to buy cannabis and investors shunned pot stocks due to these headaches.

But, those issues appear to be reversing course. According to Cowen, while supply shortages are still a big problem, that problem is quickly becoming less severe. Specifically, Cowen highlighted Canopy Growth’s hastened production, which has driven CGC’s out-of-stock rate 11 points lower from 65% to 54%.

Meanwhile, investors are starting to get bullish on CGC stock again. The stock staged a huge reversal on elevated volume after testing the $33 level, which is where the stock popped after news of the Constellation Brands investment broke in August. This level feels fundamentally supported by that huge investment, and the market seems to agree, as CGC stock has bounced big off that level.

Overall, near-term fundamentals and sentiment are improving. With the stock still 25% off recent highs, it looks this recovery rally has more runway left.

Bottom Line on CGC Stock

The long-term fundamentals on CGC stock are quite attractive with the market cap hovering below $10 billion. Meanwhile, near-term fundamentals and sentiment are improving, the stock is rallying and its still 25% off recent highs. As such, it looks like the current rally has more runway to the upside.

As of this writing, Luke Lango was long CGC.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/the-worst-is-over-for-canopy-growth-stock/.

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