Analysts continue to speak in increasingly glowing terms about Canopy Growth’s (NYSE:CGC) long-term future. However, Canopy Growth stock has been sliding downward since April.
The U.S. National Institute of Health recommends more research and standardization before cannabis edibles are legalized. Despite this warning, Canada will soon legalize derivative cannabis products such as cannabis-based edibles and beverages.
However, even the anticipation of that upcoming change has not stemmed the retreat of CGC stock. Although cannabis derivatives could become a needed positive catalyst for marijuana stocks, investors should stay away from CGC as long as the stock continues to fall.
Canopy Growth Stock Will Be a Winner Over the Long-Term
Despite its recent decline, CGC remains well-positioned in the cannabis industry. The huge investment that CGC received from Constellation Brands (NYSE:STZ) bodes well for its finances and for its ability to overcome challenges in areas such as marketing and distribution.
Also, as another InvestorPlace columnist, Chris Markoch, pointed out, the industry has reached what he referred to as a consolidation phase. Many small cannabis producers thought they could earn easy money. Most of them later found out that they cannot earn enough to meet their production costs. As a result, they ended up closing their doors.
That plays into the hands of large growers like Canopy Growth. As the second-largest producer after Aurora Cannabis (NYSE:ACB), CGC has the size, diversity, and funding to benefit from the consolidation of the cannabis sector.
Moreover, research firm Piper Jaffray just declared CGC a buy. Piper Jaffray analyst Michael Lavery credited Canopy Growth as having “staying power” even after he trimmed his target price on CGC stock from $49 to $40 per share.
The Retreat of CGC Stock Is Continuing
Still, sentiment towards Canopy Growth stock has not improved. Canopy Growth stock trades close to its 52-week lows.
It has steadily fallen since reaching a high of $52.74 per share on Apr. 29. Oversupply of cannabis and worries about valuations have weighed on CGC and other marijuana stocks. At the shares’ current price, just below $23 per share, they are more than 50% below their peak.
Despite the massive drop, the valuation of CGC stock won’t excite value investors. Currently, it trades at around 35 times its sales.
But I agree with those who say Canopy Growth should do well over the long-term. Despite the current marijuana glut, this industry will see massive growth for years to come.
The march to legalization in developed countries other than Canada will bolster the sector’s growth. Moreover, as legalization continues to sweep the U.S., CGC will eventually exercise its option to take over Acreage Holdings (OTCMKTS:ACRGF).
However, the elevated valuation of Canopy Growth stock, combined with its current downtrend, does not bode well for the shares.
Still, Canopy Growth has declined for months. And the legalization of derivative products, such as edibles and beverages, gives consumers new reasons to consume cannabis. If that becomes a catalyst for the cannabis sector, investors may again begin to profit from Canopy Growth stock.
The Bottom Line on Canopy Growth Stock
Investors should avoid CGC stock until a positive catalyst shows signs of taking the shares higher. Analysts speak in increasingly glowing terms about the long-term outlook of Canopy Growth stock. Given CGC’s size and influence, I agree with their predictions.
Falling prices and compressing multiples have defined Canopy Growth stock in recent months, as the shares continue to establish new 52-week lows.
Investors rarely make money fighting trends. For that reason, investors should, for now, watch Canopy Growth instead of buying its shares. Assuming the glut of dried cannabis continues, investors probably should not buy the shares when they’re trading at almost 35 times the company’s sales.
However, the legalization of edibles will not become a “sell the news” event for Canopy Growth because the stock has sold off for months.
Instead, legalization could give investors new reasons to buy marijuana stocks, particularly if the new products reduce the supply glut. If that development can help CGC reverse course, the shares will at least provide investors with a good trade.
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.