Why Investors Should Buy Canopy Growth Stock

Canopy Growth (NYSE:CGC) stock exploded higher at the beginning of 2019 on the back of favorable trends and fundamentals underlying both the company and marijuana stocks in general. At the start of 2019, CGC stock wastrading hands around $25. By the end of April, CGC stock had more than doubled, having risen above $50.

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But Canopy stock has not been immune to recent stock-market weakness. Specifically, as global financial markets sold off in May due to escalating trade conflicts, shares of Canopy Growth fell, too. At the end of May, Canopy Growth stock was slightly above $40, and it closed yesterday at $41.40.

Investors worry that trade conflicts could stall the global economy and stunt the expansion of the booming cannabis market. There are also concerns related to continued supply shortages in the Canadian cannabis market, as well as mixed comments from the FDA regarding potential CBD legalization in the United States.

These concerns are overstated. Trade conflicts and tariffs are a near term phenomena. Supply shortages and the FDA’s hesitancy about legalizing CBD will also dissipate over the longer term.

In the long run, all these headwinds will reverse. Thus, when it comes to the cannabis market, investors would be wise to focus on the forest instead of the trees. When they do that, they will see that the non-cyclical growth outlook of the cannabis market remains as favorable as ever.

Further, CGC stock should find technical support at $40, and positive fundamental developments over the next few months should send CGC stock price back to and even above $50. As a result, this dip looks like a good time to buy CGC stock.

Three Concerns Are Killing Canopy Stock

At present, there are three factors weighing on Canopy Growth  stock and other cannabis companies.

First, escalating trade tensions and the threat of bigger and more widespread tariffs are hurting marijuana stocks. Cannabis companies look poised to produce and transport cannabis all over the world, putting them at the epicenter of the present trade conflicts. If these conflicts persist for much longer, then as the cannabis market matures and expands, it will inevitably run into tariff headwinds.

Second, Canadian cannabis companies continue to struggle to keep up with demand. Supply shortages have been the theme of the legal Canadian cannabis market since its inception. As long as these supply shortages persist, cannabis companies will fail to fully capture the robust demand for marijuana in Canada.

Third, legalization of CBD in the U.S. took a step back as the FDA issued mixed comments regarding the healthiness of CBD. Broadly, the FDA said it doesn’t know much about CBD, implying that the substance will only be legalized after the agency studies the drug further, and that could take some time.

These Concerns Are Overstated

These concerns are overstated, mostly because they are all near-term in nature, while the long-term growth outlook underlying CGC stock is positive.

This isn’t the first trade war the U.S. has been in, and it won’t be the last. Looking at those other trade conflicts, we can see that they don’t stick around forever. They usually get resolved within a few years or less.

Further, supply shortages in Canada likewise won’t last forever, as Canopy is rapidly expanding its production to meet the country’s robust demand. And, lastly, 11 states in the U.S. have already legalized cannabis, and it really is only a matter of time before CBD is legalized throughout the U.S.

Overall, then, the present challenges facing the cannabis market and CGC stock are overstated, because they do not impact their long-term growth outlook.

Canopy Growth Stock Looks Good at This Point

The cannabis market is well-positioned to become a $200 billion-plus market globally one day, and Canopy – given its current leadership position and resource advantages – looks poised to become the leader of that market. Even if it attains just a 10% share of the cannabis market, its sales will eventually reach $20 billion, which makes today’s $14.3 billion market cap of CGC stock seem like a steal.

Against that backdrop, the near-term weakness of CGC stock price is a buying opportunity.

Moreover, in 2019, CGC stock has shown impressive technical support at the $40 level. The stock shot above $40 in early January, and has largely held that level ever since. Indeed, CGC stock price has bounced off of $40 multiple times this year, and the upward sloping 200-day moving average is also right around $40. Thus, there are many reasons to believe this stock will find support at $40.

Further, Canopy hasn’t yet reported its early 2019 numbers. Many of its cannabis peers have reported those numbers, and they were pretty good. Canopy has a history of reporting the best numbers in the group. Thus, Canopy’s upcoming earnings report (due later this month) should serve as a nice upward catalyst for Canopy Growth stock.

It’s also worth mentioning that CBD edibles, extracts and topicals will become legal in Canada no later than Oct. 17. The legalization of those three product categories will introduce a plethora of new cannabis supply into the Canadian market, which should be accompanied by a demand surge. At the same time, these products are known to have better margins than dried flower, so cannabis producers like Canopy will get a margin and sales lift in the back half of 2019.

Consequently, if you zoom out and look at the big picture at this point, now looks like a really good time to buy CGC stock.

The Bottom Line on CGC Stock

The long-term bull thesis on Canopy stock remains valid. The stock just went into sell-off mode in May because of near-term concerns surrounding trade, supply shortages, and U.S. legalization hiccups.

These concerns will inevitably pass. When they do, the focus will shift back to the company’s long-term growth outlook, which could get a big lift over the next few months, thanks to CGC’s earnings report and the legalization of edibles, extracts and topicals in Canada.

All in all, now looks like a good time to buy Canopy Growth stock. Near-term concerns are overstated, and there are a few catalysts on the horizon which could turn CGC’s  near-term weakness into strength.

As of this writing, Luke Lango was long CGC.

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/why-investors-should-buy-canopy-growth-stock/.

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