Canopy Growth Corp (NYSE:CGC) stock has been under major pressure in recent months. Attitudes and expectations for cannabis stocks in general have come crashing back down to earth.
However, here’s the good news for long-term investors: very little about Canopy’s long-term growth outlook has changed since CGC stock hit a new all-time high back in April. In other words, Canopy investors can now get the same shares of Canopy Growth stock for roughly a 50% discount.
CGC Stock Hit by Risk-Off Trade
Canopy reported a 60% quarterly decline in net revenue and a 17% earnings miss in the fiscal first quarter. The controversial ouster of Canopy’s CEO and founder Bruce Linton in July added to the uncertainty in the name.
But Seaport Global analyst Brett Hundley upgraded CGC stock to “buy” on Monday. Hundley says there’s no doubt Canopy’s recent earnings report has reset growth and profitability expectations lower in the near term. But Hundley says the so-called risk-off trade has done the most damage to Canopy Growth stock.
“However, we would argue that cannabis beta needs to improve going forward, particularly for CGC,” Hundley says.
Ironically, given the risk the ongoing trade war with China creates, Hundley said North American cannabis may end up being a relative safe haven for investors. Near-term growth expectations may have gotten out of hand.
But the ultimate projected size of the mature market and the long-term opportunity for Canopy Growth stock have not changed. The pendulum of investor sentiment swung too bullish earlier in the year. Now, it seems to have overcompensated by swinging too far back into bearish territory.
U.S. Market Is Key
As I wrote back in June, I believe the 2020 U.S. election season will be bullish for CGC stock. The Strengthening the Tenth Amendment Through Entrusting States Act of 2019 (STATES Act) aims to remove the federal government from cannabis regulation. Instead, it would make cannabis law a state-by-state issue. The bipartisan bill is co-authored by Democratic presidential candidate Senator Elizabeth Warren.
According to PredictIt, Warren has enjoyed a surge of support in the past couple of months and is now the favorite to win the nomination. With the majority of Americans favoring marijuana legalization, President Trump may not want to be on the losing side of the legalization push. He could even rain on Warren’s potential STATES Act victory parade by swooping in with his own legalization plan.
If cannabis is legalized federally or even if cannabis banking restrictions are eased, it would be a huge victory for CGC stock. Canopy has already committed $3.4 billion to a conditional buyout of U.S. retailer Acreage Holdings (OTCMKTS:ACRGF). Acreage would give Canopy a major first-mover advantage in the massive U.S. market.
Hundley says progress in Washington could also open up the Wall Street flood gates.
“Within the next two years, we think that the trillions of dollars under management in the U.S. will not only have access to cannabis as an investment, but may very well seek the industry out within what could be a volatile macro environment,” Hundley says.
The Pendulum Will Swing Back
CGC has been punished during the risk-off trade. It may take something simple to swing sentiment back in the other direction. A U.S. trade deal with China might do the trick. Another interest rate cut may rekindle the risk-on trade. Even a strong third-quarter earnings season could ease investors’ worries.
Regardless of when the pendulum swings back, nothing about Canopy’s long-term outlook has changed. Any investors who were buying CGC stock earlier this year when it was trading near $50 should remember why they bought it. Has anything seriously changed about that thesis in the past four months? Or has the share price simply gone down?
The way I see it, the biggest thing that changed about Canopy is investor sentiment. If you want to invest in cannabis, I see Canopy Growth stock as one of the top plays. If you were buying at $52, now you can buy it at nearly 50% off.
The only recommendation I would give is to not put all your cannabis eggs in one basket. Don’t just bet the house on Canopy Growth stock. Buy shares of at least four or five of the top Canadian producers. That way, you take a diversified, long-term approach to what will continue to be a high-risk, high-volatility and highly speculative cannabis market.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.