Like many cannabis stocks, Canopy Growth (NYSE:CGC) fell in Monday trading due to an FDA meeting on CBD. Marijuana stocks fell as speakers at this inquiry offered conflicting views of the marijuana industry. Although the hearing will likely not stop the march toward eventual legal status, it could motivate investors to call the valuation of CGC stock into question.
The FDA Hearing Hit CGC Stock
Last Friday, the FDA conducted its first-ever hearing on cannabidiol (CBD). More than 100 speakers offered their views on the substance, with researchers, health professionals, supporters, opponents and growers among those who spoke to the regulatory body. The 2018 Farm Bill, which legalized hemp, did not include CBD. Hence, the FDA maintains that CBD is a drug. Therefore, nobody can legally add CBD to food, beverages, or supplements in an interstate commerce setting.
CGC stock and other marijuana equities fell as speakers spoke of minimal standardization and a possible lack of concern about safety or effectiveness. Not all of the news was bad. The hearing also found strong demand for CBD. Moreover, about 65 million Americans have tried the product, and 63% felt it was effective.
Canopy’s Growth Will See Few Effects
I think this changes little for Canopy. CGC remains the leading cannabis company and demand remains high. Moreover, political trends unmistakably point to the eventual removal of the Schedule I status for marijuana.
In Texas, where I reside, the Lieutenant Governor managed to block a decriminalization bill for marijuana. However, this came over the opposition of most Texans and even most in his party. I see this as one of the last stands of the weed prohibitionists. The march for legal status continues, and such setbacks may delay the legalization trend, but they will not stop it.
Nor will it stop CGC. Between Canopy Growth’s size, its hemp production in New York State, and now, the option to buy Acreage Holdings (OTCMKTS:ACRGF), CGC should emerge as the leading marijuana company once weed becomes legal in the U.S.
CGC Stock May Suffer Even If Canopy Prospers
Nonetheless, this may not translate into gains for Canopy Growth stock. The CGC stock price has fallen to levels not seen since marijuana stocks began to recover in January. This presents a problem for evaluating CGC. With valuations still in the stratosphere, Canopy stock remains a momentum play. Monday’s closing price of $38.73 per share comes in only slightly lower than the $39.66 per share low reached on April 11th. If that level does not hold, the next historical price floor does not appear until it sees the mid-$20s per share level.
As I stated previously, the likely eventual path for Canopy Growth and peers such as Aurora Cannabis (NYSE:ACB) is one resembling that of tobacco producer Altria (NYSE:MO) or CGC investor Constellation Brands (NYSE:STZ). Eventually, it will become a stock trading at a low multiple, generating robust dividends but little in the way of excitement.
Still, since CGC stock trades at over 115 times sales, it has a long way to go before reaching that point.
The Bottom Line on CGC Stock
The FDA hearings will likely not affect the trend toward legalization, but it could cast doubts upon the valuation of CGC stock. The findings rehash both the benefits and the concerns with the marijuana legalization trend. While it gives some of the few remaining opponents some ammunition, CBD and other forms of cannabis remain in demand.
Still, the valuation of CGC stock makes the equity dangerous. It could become deadly for investors if bad news starts to affect the price of CGC. If Canopy Growth stock fails to establish a floor at close to $39 per share, the downtrend may have only just begun.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
