Canopy Growth Stock: 3 Pros, 3 Cons

CGC stock - Canopy Growth Stock: 3 Pros, 3 Cons

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Inside only a few months, marijuana companies became both a revolution and an unmitigated disaster. Canopy Growth (NYSE:CGC) perfectly demonstrated this wild ebb-and-flow. Last August, CGC stock skyrocketed nearly 72%. But since mid-October, shares melted down, eventually returning to break-even.

As things currently stand, Canopy Growth stock presents an intriguing opportunity. On the positive front, CGC benefits broadly from groundbreaking legislative momentum. In 2016, a record number of states voted for legalization to varying degrees. Two years later, several more states joined in on the action.

But on the flipside, marijuana stocks operate largely on potential. Depending on timing, this has resulted in untold riches for speculators and steep losses for those who held too long. Plus, in this market environment, relatively few people have the mood to gamble.

Still, with shares roughly half off from its closing high, it’s worth considering all angles. Here are three pros and three cons for CGC stock, starting with the bad news …

Cons

CGC Stock Has Too Much Competition: A few years ago, cannabis firms represented the niche of niche investments. None traded in reputable exchanges, meaning speculators had to resort to over-the-counter exchanges. More critically, you had no idea about what you were really investing. Fast forward to today, and you have several marijuana-related organizations listed in the New York Stock Exchange or the Nasdaq. That raised the profile for the industry, leading to major deals. For instance, tobacco giant Altria Group (NYSE:MO) took a stake in Cronos (NASDAQ:CRON) last month. For the marijuana sector, the deal-making initiatives lend legitimacy. At the same time, partnerships such as the one between CGC and Constellation Brands (NYSE:STZ) are no longer unique. The low-hanging fruit is gone, which means buying Canopy Growth stock now attracts more risk.

Legislative Momentum Is a Double-Edged Sword: One of the biggest news items for CGC stock in December was the farm bill, which in part called for hemp legalization. With the domestic agricultural industry under fire due to the ongoing trade war, President Trump signed the measure. This represented an extremely rare demonstration of bipartisan politics. More importantly, both conservatives and liberals tacitly agreed that marijuana legalization is an economic issue. With several states suffering budgetary issues, cannabis offers a viable solution. Moreover, the farm bill aligns with the growing trend of high-profile Republicans and Democrats finding consensus on a previously contentious issue. But like almost anything in this sector, this positive development cuts both ways. The farm bill will eventually open the door for anyone to grow weed. Not that I would know, but marijuana is relatively easy to cultivate. This leads to saturation, which would present a headwind for Canopy Growth stock.

Where’s the Beef? Although the legal cannabis industry is still in the early phases, I mentioned that the low-hanging fruit is gone. Certainly, Wall Street has moved past the introductory stage. It’s no longer enough merely to upload a pretty website. Increasingly, investors want to see substance. When Canada became the first G7 member state to legalize recreational weed, the novelty effect faded quickly. The positive news had to directly bolster individual cannabis firms. When that didn’t happen, shareholders panicked. This dynamic presents challenges for CGC stock. If you look at the underlying company’s financials, they don’t stand out. While it’s not fair to compare cannabis stocks with “normal” investments, most prospective buyers want something to chew on. What does Canopy Growth stock give you? Currently, an okay balance sheet and iffy profitability and growth metrics.

Pros

CGC Makes Smart Acquisitions: For any company, acquisitions are tough to assess properly. Usually a positive indicator, expansionary efforts nevertheless carry risks. Primarily, management can overpay for an asset that doesn’t deliver expected returns. However, with CGC, I’m confident in the leadership team’s strategy and vision. In a relatively quiet and underappreciated announcement, Canopy bought out Storz & Bickel in an all-cash transaction. As a marijuana vaporizer company, Storz & Bickel provides significant retail exposure for CGC stock. But it’s not just the retail element that piqued my interest. The German manufacturer is a renowned name among cannabis connoisseurs. Famous for its Volcano Digital Vaporizer, Storz & Bickel specializes in premium-quality products that deliver pure aromatics. With the base product and associated accessories, customers can expect to pay upwards of $500 or more. The best part? They’re paying it. Like its backer, Constellation Brands, CGC emphasizes quality over quantity. Their Storz & Bickel buyout further solidifies this ethos.

Canopy Offers Competitive Differentiation: The push for quality products doesn’t just bring CGC stock into a better light compared to the competition. Moving forward, this strategy will determine whether the company can keep the lights on. As I previously mentioned, the farm bill bolsters the entire cannabis industry, turning an illegal venture into a legitimate one. But if everyone jumps on board, the net profit in the weed business will be severely limited. That’s because the barrier to entry is very low. While I’m not suggesting that growing marijuana is a braindead activity, it doesn’t take much: all you really need is some land, cannabis seeds and a conducive environment. Should marijuana truly go mainstream, CGC will advantage its cannabidiol (CBD) and cannabis-extract business. CBD is what separates the contenders from the pretenders. This is the arena where top manufacturers can extract unique cannabis strains that address specific ailments or symptoms. Such products marry technology with botany, an avenue for which underfunded newcomers won’t have an answer.

Canopy Growth Stock Has Stabilized: Finally, risk-tolerant buyers should consider the technical argument for CGC stock. Like almost every other name in weed, Canopy has taken a beatdown over the past three months. At the same time, I think the negativity is overdone. While many questions remain concerning the burgeoning sector, the bottom line is that all indicators point toward broader acceptance. At a time when no one can agree on anything, everyone agrees on marijuana legalization. Although it’s possible that weed stocks can crumble from here on out, it’s highly unlikely. The demand is too strong. Coincidentally, Canopy Growth stock has finally stabilized. Of course, this doesn’t guarantee anything. But after a near-50% haircut, it’s reasonably safe to assume most of the bad news is baked in.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/pros-cons-canopy-growth-stock/.

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