Is the High Multiple of Canopy Growth Stock Beginning to Fade?

Canopy Growth (NYSE:CGC) stock fell on Friday following comments by the largest investor in CGC stock, Constellation Brands (NYSE:STZ). Though Canopy stock recovered on Monday, this was another in a series of incidents that creates doubt about the short-term outlook of CGC stock.

Canopy Growth, CGC
Source: Shutterstock

Now, with the CGC stock price below the critical $40 per share level, traders are wondering whether it will bounce or fall further. Although CGC should remain a top marijuana stock, investors may struggle to profit from Canopy stock as the industry battles for legal status in the U.S.

Constellation Takes Aim at Canopy Growth

During Constellation’s quarterly earnings conference call, Constellation CEO William Newlands expressed disappointment in CGC’s fourth-quarter earnings. Canopy Growth reported more losses and a sequential drop in revenue from the previous quarter.

But Newlands stated that he still felt pleased overall about his investment in  CGC stock. He reiterated his commitment to support “a focused long-term strategy to win markets and form factors that matter, while paving the way to profitability.”

Canopy Growth and CGC stock

Still, the comments highlight the difference I brought up in my recent article between Canopy Growth and CGC stock. I don’t think  Newlands should regret his company’s purchase of Canopy Growth stock. CGC has nearly quadrupled since Constellation announced its initial investment in October 2017.

However,  CGC stock trades at more than 80 times its sales. Other marijuana stocks such as Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY), and Cronos Group (NASDAQ:CRON) are also overvalued. However, at such multiples, stocks need ever-greater levels of euphoria to move higher. A mixed quarterly report and a subsequent reduction of quarterly revenue by CGC will likely not bring the needed jubilation.

Moreover, the hoped-for full legalization of cannabis in the U.S. has not happened as quickly as hoped. The legalization of hemp in the U.S. gave Canopy Growth and other cannabis companies a segue into America. Also, CGC’s pending merger with Acreage Holdings (OTCMKTS:ACRGF) could boost Canopy Growth stock if it closes. Still, that cannot happen if Congress doesn’t legalize cannabis. This situation leaves traders with uncertainty about CGC and a lower sense of morale.

What Should Worry the Owners of CGC Stock

I believe CGC stock price will be higher ten years from now. Also, as I stated previously, I do not think the anti-cannabis forces in the U.S. will succeed in keeping marijuana illegal over the long term.

But traders should be worried about the status of CGC stock and other marijuana equities when legalization finally occurs. CGC will not trade at 80 times its sales forever. At some point, marijuana stocks will lose their buzz. Consequently, they will eventually sell at valuations like Constellation, Altria (NYSE:MO), and other so-called “sin stocks,” which typically trade at under five times their sales. With the life span  of the marijuana stock bubble in question and cannabis stocks fading, I do not think this is the time to own these overvalued stocks.

The Bottom Line on CGC Stock

The move toward legalization in the U.S. will likely help Canopy Growth the company more than it helps CGC stock. Moreover, Canopy’s business and legal struggles have weighed on CGC stock in recent days. The CEO of Constellation sowed further doubt by criticizing Canopy’s performance.

These events create further doubt about how long CGC stock and other marijuana stocks will command premium valuations. The U.S. will likely legalize marijuana at some point. However, prohibitionists have staved off the tide of legalization for now in many areas. By the time pro-cannabis forces succeed in the U.S., the hype surrounding marijuana stocks may have faded.

I see a bright future for Canopy Growth stock and the cannabis industry. However, with near-term doubts only mounting, I would stay away until their multiples fall to more reasonable levels.

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.

 


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