Canopy Growth Emerges as Top ‘Cannabis 2.0’ Stock

The company faces major headwinds, but CGC stock is still attractive

Canadian cannabis leader Canopy Growth Corporation (NYSE:CGC) exploded over the past two years, from a low point of around $5 in 2017 to $57 in late 2018. However, CGC stock now trades nearly 60% lower than its high, at $23.83 a share. All as investors lost confidence with a spate of lousy industry hiccups, the dismissal of CEO Bruce Linton, and earnings that left a lot to be desired.

Canopy Growth Emerges as Top 'Cannabis 2.0' Stock
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Negative analyst coverage can also be blamed. However, while analysts have been negative, we are seeing strong signs of life ahead for Canopy Growth stock.

Canopy Growth Has Fallen on Hard Times

Canopy Growth fell in recent weeks after Oppenheimer analyst Rupesh Parikh warned that investors should brace for bigger losses in the next two years.

In fact, after initiating coverage of Canopy Growth with a “perform” rating, he warned CGC is facing over $500 million in bottom-line losses in the two-year period ending March 2021.

At the same time, the analyst was still encouraged.

For one, he suggested Canopy Growth is well-positioned to capitalize on the global cannabis market. Two, the analyst was encouraged by Constellation Brand’s (NYSE:STZ) $4 billion cash infusion, and the company’s sizable footprint in Canada’s cannabis market.

Bank of America analysts also cut their coverage of the stock to “neutral” from a “buy” rating, concerned that growth in key Canadian markets could be lower than many of Canopy’s peers.

Earnings didn’t exactly help the stock either. While revenue grew over the last year from $25.9 million CAD to $90.5 million CAD, net losses of $3.70 per share were well above forecasts for a loss of 38 cents. Fortunately, there was some good news. Canopy’s $1.28 billion loss was the result of extinguishing losses with its partner Constellation Brands. That was a one-time write off.

In addition, CEO Mark Zekulin says the company is still on track, noting, “We are fixated on the process of evolving from builders to operators over the remainder of this fiscal year, meaning that as our expansion program comes to a close in Canada, and as new value-add products come to market in Canada, we demonstrate a sustainable, high margin, profitable Canadian business.”

What’s Next for Canopy Growth Stock?

Granted, the cannabis market has been weaker than expected, and CGC investors have suffered from the decline. However, investors may want to buy shares at these levels, especially as we near Cannabis 2.0 over the next three weeks.

That’s when Canada is expected to legalize CBD edibles, beverages and topicals just a year after approving the use of dried cannabis flower, oils and sprays.

According to analysts at Deloitte, this could create a $2.7 billion opportunity for the industry. In fact, according to their report Nurturing new growth: Canada gets ready for Cannabis 2.0, legalization of edibles will “create new product mixes that will reach consumers who may have been reluctant to try traditional cannabis consumption methods that are currently available.”

Of the many companies that stand to benefit, Aurora Cannabis (NYSE:ACB) announced its expansion into edibles, vapes and concentrates. Even Hexo Corporation’s (NYSE:HEXO) partnership with Molson Coors Brewing (NYSE:TAP) will allow it to profit from cannabis-infused drinks, too.

Canopy Growth also sees the legalization of CBD as a major catalyst, as well. All as it expands its Canadian store from 460 in September to 600 by early 2020, and as CFO Mike Lee says the company is gearing up to launch edibles, beverages and vape products later this year.

What’s more, the opioid epidemic has exposed a nerve in the U.S., and politicians are becoming more vocal about curbing the supply of painkillers. A recent study by Claudio Deiana and Ludovica Giua — State Laws, Prescription Opiods and Crime — shows that legal medical marijuana dispensaries in conjunction with regulations on opioid demand have reduced painkiller distributions:

“We find that the opening of medical marijuana active dispensaries alone does not affect the quantity of legally distributed opioids over the period 2001-2016. Yet, when access to cannabis for medical purposes is combined with demand-side regulations (namely, DSLs) we observe a decrease in the quantity of opioids sold, which suggests a substitution towards marijuana, especially when methadone is excluded from the analysis.”

Strategic Partnerships Give Canopy an Edge

Other than Cannabis 2.0, Canopy has been aggressively ramping up production through acquisitions and organic growth. For example, in its most recent quarter, production increased 183% to 40,960 kilograms quarter over quarter. Its ability to scale will help improve margins.

A massive $4 billion investment from Constellation has also provided CGC with key market advantages, including global distribution possibilities.

In addition, while CGC’s acquisition of Acreage Holdings (OTCMKTS:ACRGF) is contingent on cannabis legalization in the U.S., once that happens CGC could benefit significantly. Another interesting deal was CGC’s acquisition of KeyLeaf Life Sciences, a Saskatoon-based bio-product extractor that will help support its CBD opportunity in the U.S.

The Bottom Line for CGC Stock

While a 60% drop in the CGC stock is stomach-churning, it appears the market has become far too negative with a lousy market environment, and CGC earnings that left much to be desired.

However, Canopy Growth is still one of the best companies in the industry. In addition, the launch of higher margin Cannabis 2.0 products can be a game changer for the stock. Overall, CGC is worth accumulating with long-term industry growth still very much intact.

For long-term investors, CGC appears attractive at current prices.

As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.

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