Shares of Canopy Growth (NYSE:CGC) went parabolic to start 2019, as the leading Canadian cannabis company benefited from a series of industry-wide and company-specific catalysts which further illuminated a pathway towards big profits at scale. Year-to-date, CGC stock is up roughly 75%.
But stocks don’t go up in straight lines forever. Indeed, CGC stock has experienced some weakness as of late. There were some margin concerns in the company’s recent earnings report. There was news that the CFO is leaving the company later this year. And, there was a rare downgrade from Wall Street.
All together, CGC stock currently sits about 8% off its 2019 highs.
This recent weakness isn’t anything to be too concerned about. CGC stock had come very far, very fast and had jumped into technically overbought territory. It was due for a natural pullback. Now, it’s due for some natural consolidation in the $40 range.
Importantly, though, CGC stock is not fundamentally overvalued. Recent developments and quarterly numbers underscore that Canopy is on track to potentially become a $100 billion company one day. As such, the long-term potential ($16 billion market cap today) is enormous, with mitigated enough risk to warrant sticking with CGC stock for the long haul.
Ultimately, recent weakness is just a bump in the road and this road will eventually take CGC stock much higher.
Canopy Stock Was Due for a Pullback
One of the truest statements in the entire investment world is that stocks don’t go up in straight lines forever. That which goes very far, very fast, will ultimately pull back. That doesn’t say anything about the nature of the stock or the company. It’s simply the theory of financial gravity — buyers won’t out-buy sellers forever.
Recent weakness in Canopy stock should be perceived through this lens. At one point in time, Canopy stock was up a whopping 90% year to date. That point in time was Jan. 28, meaning shares of Canopy had rallied 90% in less than a month. That is a textbook definition of a stock going very far, very fast.
Granted, the big rally was rooted in fundamentals. Namely, Canopy flexed its muscles as the leader in the global cannabis market by expanding global distribution, pushing into the U.S. hemp market, and reporting record third-quarter numbers. Still, up 90% in less than a month, CGC stock was overbought. Regardless of the fundamentals, it needed to cool off.
Now, it’s cooling off. It will continue to cool off for the foreseeable future. Investor sentiment needs to calm down and become less euphoric. The moving averages need to catch up. Investors should expect CGC stock to be range bound between $40-$50 for a few weeks.
Thereafter, CGC stock will resume its rally higher. Why? Because the fundamentals continue to point to huge upside in a long-term window.
The Fundamentals Remain Healthy
The long-term bull thesis on CGC stock is simple.
Canopy Growth is the head-and-shoulders leader in the now fully legal Canadian cannabis market and will use that leadership position and a $4 billion investment from and partnership with global alcoholic beverage giant Constellation Brands (NYSE:STZ) to become one of, if not the, biggest player in the global cannabis space. This space projects to be a several-hundred-billion-dollar industry within the next 10 to 15 years as fully legal becomes the global norm. As such, Canopy reasonably projects to do several billion dollars in revenues and profits within the next 10 to 15 years, and that will easily translate into a $100 billion-plus market cap for CGC stock using market average multiples.
All appears to be intact with this long-term bull thesis at the current time.
Recent quarterly numbers suggest that Canopy is still the dominant force in the Canadian cannabis market. Canopy reported over $60 million in net revenue in the third quarter. That is, far and away, the largest revenue quarter any Canadian cannabis company has reported. Ever. It’s also up nearly 300% year over year. Canopy also sold over 10,000 kilograms of cannabis during the quarter — far above what peers are reporting and up 350% year over year. Clearly, Canopy is still dominating the Canadian cannabis market.
Meanwhile, Canopy is the first Canadian cannabis company to make a big push into the U.S. hemp market with operations set to proceed in New York. Canopy is also using its cash to acquire multiple smaller players, further increasing its reach and portfolio of cannabis brands. The company is also making big moves in Peru, Poland and the United Kingdom.
Overall, everything is moving in the right direction for Canopy. The company is continuing to dominate fully legal cannabis markets, is making big moves into newly legal cannabis markets and is expanding its reach and portfolio through acquisitions. In other words, Canopy looks like it’s in the early stages of becoming the Constellation Brands or Altria (NYSE:MO) of the cannabis industry.
So long as that thesis remains true, fundamentals will keep CGC stock on a long-term uptrend.
Bottom Line on CGC Stock
Canopy Growth is a long-term winner going through some near term consolidation. In the big picture, this near-term consolidation is healthy.
CGC stock will resume its uptrend later in 2019 as more fundamental catalysts arrive (strong quarters, further legalization, deeper global distribution, Wall Street upgrades, so on and so forth). Until then, buying on weakness and holding for the long haul remains the winning strategy.
As of this writing, Luke Lango was long CGC.
