For the bulk of 2019, marijuana stock have tried investors’ nerves and Canopy Growth (NYSE:CGC) stock has largely followed that trend.
Canopy Growth stock has fallen 26% this year, but believe it or not, that performance actually compares favorably with some rival cannabis names. And to the credit of CGC stock, it’s about 15% above its recently achieved 52-week low. Not surprisingly, analysts are mostly lukewarm on the Canadian cannabis grower.
Earlier this month, Seaport Global analyst Brett Hundley cut his rating on Canopy Growth stock to “neutral” from “buy.” Worse than the lower rating is the analyst’s gloomier revenue outlook. He now expects CGC to notch fiscal 2021 sales of $359.4 million, down from his prior estimate of $412.4 million.
And to top it all off, Hundley doesn’t think CGC stock will benefit in the near-term from its partnership with Constellation Brands (NYSE:STZ). That’s because, with CGC stock so depressed, Constellation won’t be compelled to exercise its warrants on the shares. The exercise of the warrants was an“added cash assumption (that) had been a core tenet of our Buy rating under our valuation analysis,” wrote Hundley.
The analyst added that the current 1.75 price-book ratio of CGC stock indicates “just modest upside from current levels, and thus we are moving to the sidelines on this name.”
Canopy the Contrarian
Investors who are currently considering buying Canopy Growth stock are undoubtedly contrarians. But sometimes contrarian wagers pay off.
CGC stock is a contrarian bet not just because the shares have tumbled so much, but also because its chart is a mess. Given that chart, it appears that the aforementioned rally off the 52-week lows needs to continue for it to gain momentum and credibility.
On the other hand, some fundamental trends are in Canopy’s favor, including the growth of the Canadian market and some new products.
Cowen analyst Vivien Azer wrote in a note to clients on Friday that, as investors are “resetting their expectations for Canadian marijuana stocks, she’s looking for any indication of incremental progress heading into third-quarter earnings,” according to Barron’s Connor Smith.
Azer, one of the most highly regarded cannabis analysts, notes that Canadian cannabis retail sales have doubled over the past five or six months.
“This performance comes while the industry has faced multiple headwinds from novel form factor delays, widening price gaps vs. illicit market, lack of retail infrastructure, as well as an inventory glut in oil/capsules and value-based dry flower,” she said.
Potentially adding to the case for bottom fishing with Canopy Growth stock is Canada’s recent legalization of new cannabis products, including high-margin beverages and edibles. Sales of the new products to consumers are expected to begin in December. To its credit, CGC was quick to respond, rolling out 16 newly legalized products.
Cannabis-infused beverages and edibles may not yet be affecting Canopy Growth stock for the better, but the potential is there because those are lucrative markets. A recent Deloitte study indicates Canada’s alternative marijuana products market could be valued at $2.7 billion, with edibles representing $1.6 billion of that figure.
The Bottom Line on CGC Stock
As has been previously noted, despite the weakness in the shares for much of this year, Canopy isn’t a particularly cheap stock. Integral to the Canopy thesis is the company’s ability to expand margins next year.
“Canopy expects margin to return to the 40% range by the end of fiscal 2020,” said Morningstar in a recent research note. “As such, we aren’t concerned by the tighter margins and expect them to return to higher historical levels. Furthermore, we continue to expect that rapidly rising overhead expenses will decline as a percentage of sales in the long term as the company and industry mature.”
Canopy will report its earnings on Nov. 14, with analysts, on average, forecasting a loss of 26 cents per share. If CGC’s headline results can beat expectations or its margins improve, CGC stock would probably rally.
As of this writing, Todd Shriber did not own any of the aforementioned securities.