Canopy Growth Stock Is an Intriguing Cannabis Name

CGC stock could face some near-term issues, but its long-term outlook is bright

The marijuana stocks trading on major U.S. exchanges are following similar trajectories this year. Many of the group’s marquee members rallied in the first four months of the year, but the recent shift away from riskier assets has pinched some cannabis stocks.

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Canopy Growth Corp. (NYSE:CGC) is one weed stock underscoring the aforementioned trend. CGC stock is up more than 65% year-to-date, even though CGC stock price has fallen by almost 8% in May. Canopy stock has a market cap of $15.5 billion as of May 28, putting it in mid-cap territory.

CGC stock, like other marijuana stocks, is viewed as a growth play. as the cannabis market is still in its early innings of expansion. However, the dynamics of the cannabis market are shifting rapidly, putting some burden on cannabis companies to justify their lofty multiples and valuations. While some marijuana stocks entice investors with growth prospects, not all cannabis makers are fundamentally sound.

Canopy stock is one of the more fundamentally impressive names in the burgeoning cannabis arena, and the company is taking steps to expand its already enviable market share in cannabis.

Making Moves

One of the catalysts for Canopy Growth stock is the company’s efforts to make inroads into the pharmaceuticals market, using its CBD products. To that end, earlier this month, Canopy acquired U.K.-based  CBD-product maker This Works for about $54 million.

“This acquisition is a key aspect of a multi-faceted hemp and CBD strategy as Canopy Growth continues to build upon its vertically-integrated production and marketing platform,” Canopy stated.

This Works makes CBD-infused products, including deep sleep pillow spray, morning expert hyaluronic serum, and skin deep dry leg oil. While it may take some time for a $54 million deal to make an impact on CGC stock, the company’s move into a more consumer-facing part of the CBD space shows Canopy management is looking to diversify its product mix, which remains focused on recreational cannabis.

Among the biggest moves the company is attempting to make, and one that could be a boon for CGC stock, is a foray into the lucrative U.S. cannabis market. Earlier this year, Canopy offered to buy Acreage Holdings (OTC:ACGRF) for $3.4 billion. The yet-to-be-completed deal is a sign that  Canopy is looking for ways to bet that cannabis will be increasingly legalized  in the U.S.

“Canopy would make a $300 million cash payment to Acreage stockholders—worth about $2.55 per Acreage share—if shareholders approve the deal,” reports Barron’s. “Canopy would then wait for pot to become federally legal in the U.S. before taking control of Acreage with an exchange of 0.5818 Canopy shares for each share of Acreage stock. The total value, the companies say, is worth 40% more than the Acreage share price before the deal was announced.”

Of significant importance for Canopy Growth stock is the fact that the company is enhancing one of its core competencies: cultivating cannabis. The owners of CGC stock may need to be patient on this front, but the company’s improved cannabis manufacturing efforts could have a positive impact on Canopy stock next year.

“There are still cultivation and post-harvest processes that need to ramp and normalize at both B.C. greenhouses,” said BMO Capital markets analyst Tamy Chen in a recent note. “In addition, Canopy is ramping another sizable greenhouse in Quebec. We believe it takes multiple harvests to develop the knowledge that will improve yields and lower cost per gram.”

The Bottom Line on CGC Stock

Given the rich valuations reflected by CGC stock price, the company cannot afford even minor missteps over the near-term because skittish investors could react in knee-jerk fashion by dumping Canopy stock. That is a familiar scenario for many growth companies in exciting, fast-growing market segments.

Assuming the deal for Acreage Holdings is approved and Canopy gets a highly sought after U.S. footprint, that would be a major boon for Canopy Growth stock and the U.S. domestic cannabis industry at large.

Over the near-term, investors considering Canopy stock should stay informed about news on Capitol Hill regarding the fates of the Secure and Fair Enforcement (SAFE) Banking Act and the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, two pieces of legislation that, if approved, could speed the legislation of cannabis and CBD across the U.S.

Todd Shriber does now own any of the aforementioned securities.

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