The cannabis industry as a whole continues to face unforeseen pressures, and Canopy Growth (NYSE:CGC) hasn’t been an exception to that headwind. But, of all the marijuana stocks worth a closer look now, CGC stock is at the top of that relatively short list.
That’s not been the case in a long, long while. In July, CGC’s board of directors, which is mostly controlled by the company’s single-biggest shareholder Constellation Brands (NYSE:STZ), terminated CEO Bruce Linton. This led to a disruption at a critical time for cannabis companies.
A sequential decline in quarterly revenue rattled owners of Canopy Growth stock in August as well, further fanning already-bearish flames. The backdrop has been decidedly grim.
Yet, this month’s rebound effort is undeniable, and arguably well-supported.
Canopy Growth Stock Takes the Lead
Since early this month, cannabis stocks have started to put some distance between themselves in terms of performance. Tilray (NASDAQ:TLRY) is up 21% since the end of August, while Aurora Cannabis (NYSE:ACB) has broken even and CannTrust Holdings (NYSE:CTST) has given up 13% of its value.
CGC stock is at the upper end of that performance race, gaining nearly 19% this month.
The divergence likely has much to do with an increasing understanding of each companies’ nuances following a wave of earnings reports.
That’s certainly been the case for Canopy Growth, which has enjoyed the added benefit of interim CEO Mark Zekulin making a proactive effort to unwind some of the damage that’s been done to Canopy Growth stock over the course of the past two months. His focal point?
“We have been in construction for 70 months,” Zekulin told CNN. “We have four months left on that expansion plan. … A lot of that work is now done and the real focus is taking the chess board that we’ve set and really focusing on now executing.”
The market seems to be buying the idea, although there’s an even bigger reason CGC stock could have rekindled its bullishness.
Winning Where it Counts
The cannabis industry is still gelling, and its players are still trying to figure out their place in it.
Canopy Growth’s place is, for the most part, recreational marijuana — and recreational marijuana in Canada in particular. For the quarter ending in June, 72% of revenue was made up by sales of recreational cannabis, and only 12% of its sales were made to international customers. And, 80% of its gross sales were of dry cannabis used for smoking.
The revenue headwind was and is a legitimate concern. But a couple of key details were glossed over by a market that was ready to see the glass as half empty rather than half full. Chief among those details is the fact that the revenue lull wasn’t the indication of waning demand it was being made out to be.
The evidence: The average selling price of cannabis, per gram, in Canada hasn’t swayed since mid-July, holding steady at $7.22 CAD. Prices in the United States, meanwhile, have actually improved since mid-July, negating the chatter that supply has far outpaced demand.
In that vein, although the quarter ending in June wasn’t the one Canopy Growth stock owners were hoping for, demand continued to rise. Adult-use purchases of cannabis in Canada reached a record $85 CAD million in June, rising for a fourth-straight month.
That’s right in Canopy’s sweet spot. And it’s happening at a time when the company is about to maximize all those pieces on the proverbial chess board.
The Bottom Line for CGC Stock
Don’t misread the message. Canopy still has much to prove, and even with the recent selloff, the stock remains outrageously overvalued.
That’s not a particularly big liability in this instance though. While Canopy Growth admittedly spent too aggressively on acquisitions, those acquisitions do improve the company’s capacity to connect with consumers and secure more supply. Canopy just needs to get more out of those assets. That’s in the works, even before a new CEO takes the helm.
How far or how high that might take CGC stock remains uncertain. But, up 20% from last month’s low is a good start to a rebound. And it has plenty of backing via lip service.
You could certainly do worse.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.
