With the new year fast approaching, investors are hyper focused on identifying fast-growing industries and pinpointing winners within those industries in order to beef up their portfolios. Cannabis is one such field that has been in focus among investors hoping to capitalize on the next big thing and Canopy Growth (NYSE:CGC) is one stock investors have been excited about. CGC stock made its way toward $60 per share back in October, but the share price has since come back down to earth providing keen traders with a window of opportunity. But the major question is: does Canopy Growth stock have the potential to deliver impressive returns in the coming year or is it just another over-hyped stock ready to come crashing down?
Earlier this month, CGC stock was dealt a blow when Macquarie downgraded Constellation Brands (NYSE:STZ) because of the firm’s investment in Canopy Growth. The firm said they expect CGC stock to deliver “subpar returns” because the company is unlikely to turn a profit in the near term.
That’s fair, because it’s true CGC isn’t profitable and probably won’t be in the immediate future. However, Canopy Growth is a long-term play in the marijuana space and the company’s efforts to grab marketshare and grow sales should be commended even though they’re not paying off just yet. Investors hoping to make a quick buck tomorrow should avoid CGC, but for those with an eye on the longer-term future it could be a worthwhile investment.
The cannabis field isn’t going anywhere and by almost all accounts, it’s likely to grow big-time in the years to come. Marijuana for both recreational and medicinal use is becoming more widely-accepted which suggests that legalization on all fronts is on the horizon.
Earlier this month a farm bill proposing to spend $867 million on agricultural development in the U.S. made its way through Congress and had a major impact on CGC’s future growth potential. The new bill included a small but mighty measure that will make hemp fully legal in the U.S. Not only is this a step toward legalizing all forms of cannabis in the U.S., but according to Canopy CEO Bruce Linton, the legislation means that “Canopy Growth will participate in the American market now that there is a clear federally-permissible path to the market.”
Plus, CGC’s partnership with Constellation Brands puts the company in a great spot to capitalize on growing acceptance of cannabis products. The two are planning to develop cannabis-infused beverages which would put using cannabis recreationally on-par with drinking alcohol. Of course, cannabis would need to be decriminalized in the U.S. before such a product can become a reality, but most agree it’s only a matter of time before that happens.
CGC Stock Valuation
Although most can agree that investing in the blossoming cannabis market makes sense, it’s a little bit tougher to choose a winner from the many marijuana stocks out there. Because the industry is still so new and hasn’t been completely freed from the shackles of criminal law, it’s difficult to pick a winning horse just yet.
The trouble with CGC stock is that it’s expensive. The firm’s trades at 132 times its sales compared to the healthcare industry average of just 2.25 times sales. Not only that, but the company is up against a lot of competition in an ever changing industry that is likely to see a great deal of volatility in the months to come. Anything so closely tied to politics is bound to see some major swings.
The Bottom Line for CGC Stock
CGC isn’t a bad pick in the marijuana space, the company has proven itself to be a major player in the industry and it’s tie up with STZ is a big deal for the firm’s future.
However, it’s worth noting that a pure marijuana play this early in the game is risky because changing legislation and a rapidly evolving market are all likely to create volatility in the short term. If you’re looking for something more stable, consider investing in STZ instead; the firm’s sizable stake in CGC stock means you’re still playing the marijuana trend, but you’re getting a more stable company with better cashflow and a successful beverage business to balance out the risk.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.