An accepted definition of contrarian is “a person who opposes or rejects popular opinion, especially in stock exchange dealing.” If you’ve read one of my recent articles about Canopy Growth (NYSE:CGC), you might say I’m a contrarian about CGC stock.
I’ve argued that investing in Canopy Growth stock is less about what you believe about Canopy and more about what you believe about the industry. I still believe that. But I don’t feel like I’m being a contrarian, at least for the sake of being a contrarian.
Instead, I still hold on to my fundamental belief that legalization of marijuana on a worldwide scale is no longer an “if” proposition. And while the when is not clear, the day is coming. When it does, CGC is well positioned to capitalize on the opportunities.
The Honeymoon Is Over for Cannabis Stocks
At this time last year, marijuana achieved full legalization status in Canada. The markets probably overreacted to the news. As a result, cannabis stocks, such as CGC went through the roof. They’ve since come crashing down.
While investors love analogies (writers do too), the honeymoon analogy may not be apt. The marijuana industry, and the companies who are publicly trading their stocks, aren’t ready for that kind of commitment. They still have some kinks to work out.
Some of this is in the form of legalization. Some of it is getting a regulatory framework in place. Both of these things will take time. In the meantime, there will continue to be pain for many stocks like Canopy.
That doesn’t mean, however, that investors should still not keep an eye on CGC stock.
Canopy Will Remain Active in the Next Phase of the Cannabis Business Cycle
The business cycle for cannabis companies is moving into the growth and acquisition phase. The playing field is defined. Now companies are creating alliances to position themselves to take advantage of new applications for cannabis in other industries. In the process, cannabis companies have to show prospective partners why they are a better option than their peers.
Canopy has 3.8 billion reasons to be taken seriously in this regard. That’s the amount that the company still has on its books from Constellation Brands (NYSE:STZ). Constellation made a $5 billion investment in CGC with the expectation that the two companies would be well-positioned in the cannabis-infused drink market. A recent acquisition is showing how that might take shape.
On Oct. 22, Canopy announced that it was acquiring 72% of BioSteel Sports Nutrition. BioSteel is a nutritional company that’s popular with many athletes. The global sports nutrition market is worth an estimated $50 billion. Canopy Growth’s CEO Mark Zekulin is optimistic for the prospects of cannabidiol (CBD) in that segment. Zekulin stated:
This acquisition allows us to enter the sports nutrition space with a strong and growing brand…We view the adoption of CBD in future BioSteel offerings as a potentially significant and disruptive growth driver for our business.
Canopy Is Expanding Its International Operations
Canopy’s Spectrum Therapeutics division recently obtained licenses from the Medicines and Healthcare Products Regulatory Agency (MHRA) and Home Office in the U.K. This will allow the company to store and distribute cannabis-based medicinal products throughout Great Britain.
This announcement is one way that Canopy Growth is closing the gap with Aurora Cannabis (NYSE:ACB) with regard to the respective international footprints of the two companies. And with the cash it has on hand from Constellation, Canopy will have more capital to allocate toward expansion.
Investors Want to See a Profit Path for CGC Stock
In the last year, Canopy Growth has seen its former CEO get the boot by Constellation Brands. CGC has also seen its strength as Canada’s largest grower turned into a liability as regulatory bottlenecks created excessive supply.
At the heart of it all, investors want to see profits, or at least a path to profitability. But in this industry, profits are still a ways off.
You can question Canopy’s valuation and I can’t disagree with the math. However, the question is how low do you think the stock will go? A recent headline is saying that several analysts have lowered their price targets for CGC stock. However, in each case, the price target still remains above where the stock is currently trading. And analysts still have a consensus “buy” rating on the stock. This is true despite that the number of analysts covering the stock has more than tripled in the past year.
It doesn’t take a contrarian to point out that while analysts may not “love” CGC stock, they still like it more than most other cannabis stocks. With Constellation taking an active role in making sure the company is being a good steward of its investment, Canopy should be able to wait out legalization and regulatory issues.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.