After years of hype, pot stocks finally went parabolic in mid-2018 after big money started to enter the space. Some called the parabolic move higher in pot stocks a bubble. Others called it an opportunity. The latter group was right. Turns out, pot stocks aren’t Bitcoin 2.0. Instead, pot stocks have great long term growth fundamentals, rooted mostly in the fact that current trends imply that recreational cannabis will one day be as big as (if not bigger than) the $500 billion-plus global alcoholic beverage and tobacco markets.
At the head of the group is Canopy Growth (NYSE:CGC). Canopy is the unparalleled leader in the fully legal Canadian cannabis market. They also have one of the largest production footprints in the cannabis industry, a $4 billion investment from Constellation Brands (NYSE:STZ) on the balance sheet, and a deal in place to acquire big U.S. cannabis company Acreage once cannabis becomes fully legal in the U.S.
In other words, Canopy Growth is the runaway leader in the global cannabis market, and projects to be the leader of this potential $500 billion-plus industry in the future. That’s why CGC stock is up 60% year-to-date, and 90% over the past year.
But CGC stock has run into some turbulence recently. Over the past three weeks, CGC stock has dropped nearly 20% off its late April all time highs.
Investors shouldn’t be concerned about this weakness. Instead, they should embrace it. This weakness is nothing more than an opportunity to accumulate a long-term winning stock at a winning price. Why? There’s three big reasons why investors shouldn’t sell Canopy Growth stock here. Those reasons are as follows.
Trade-Related Headwinds Could Reverse Course
The first big reason not to sell CGC stock here is that the headwinds which have sparked the sell-off aren’t all that relevant — and they could reverse course pretty soon.
CGC stock didn’t fall in isolation. It dropped alongside a market meltdown which was sparked by escalating trade war tensions and a fresh round of tariffs. But none of this is all that relevant to Canopy Growth, which is a Canada-based cannabis company that gets most of its revenue from Canada and doesn’t have much U.S-China trade risk or exposure. Thus, macro headwinds are creating unnecessary weakness in Canopy stock.
Further, these headwinds could reverse course soon. U.S. President Donald Trump has married himself to the stock market, and this fresh round of tariffs has a grace period for in-transit goods. That combination ultimately implies that the U.S. wants to get a deal done soon. China does, too, since the entire 2019 rebound in their economy has been predicated on improving trade conditions. As such, it’s fairly likely these two nations reach a trade agreement fairly soon, in which case current macro headwinds will soon turn into macro tailwinds, and the current sell-off in CGC stock will turn into a rally.
The Canadian Market Will Be Just Fine
The second reason not to sell CGC stock is that concerns related to a Canadian cannabis market slowdown are overstated.
There have been some concerns that the Canadian cannabis market is slowing. Those concerns stem from Canadian cannabis company Cronos (NASDAQ:CRON) reporting weaker-than-expected first-quarter numbers, as well as new survey from Dalhousie University which implies that enthusiasm for legal edibles isn’t all that high. There are also some new licensing rules at play in the Canada market which could exacerbate the ongoing supply shortage problem, which has led to unimpressive cannabis sales ramp in early 2019.
But, these are all near-term concerns. In the big picture, young consumers globally like to smoke weed more than they like to drink alcohol, and that will ultimately manifest itself into big demand globally. Sure, demand may be fickle today, but that’s probably because the industry is so new, consumers don’t know how to buy cannabis legally at scale, and there are supply shortages everywhere. All these things will get fixed over time. As they do, near-term headaches will turn into long-term gains, and that will ultimately power CGC stock way higher.
The Big U.S. Market Tailwind Has Yet to Arrive
The third reason not to sell CGC stock is that the stock’s biggest catalyst hasn’t even arrived yet.
In the cannabis world, the Canadian cannabis market is small peanuts. Most analysts peg it as somewhere around a $10 billion potential market. The golden goose here is the U.S. cannabis market, which is pegged at a $100 billion potential market, or roughly tenfold that of the Canadian market. Thus, all these near-term concerns surrounding supply shortages in the nascent Canadian cannabis market are really small in the big picture.
In that big picture, it’s all about the U.S. market, which Canopy is set to dominate thanks to its deal to acquire Acreage upon legalization of cannabis in the U.S. That huge catalyst hasn’t even arrived yet. Selling a stock before its big catalyst has even arrived is short-sighted.
Bottom Line on CGC Stock
CGC stock has been a big winner over the past year and in 2019 for a reason: this is a global cannabis company that is in the first inning of a huge, long-term growth narrative that could one day produce a $100 billion company.
Canopy stock has dropped over the past few weeks. But nothing about that long term growth narrative has changed. Consequently, investors should embrace recent weakness as an opportunity add on the dip.
As of this writing, Luke Lango was long CGC.
