Evaluating the Risk/Reward of Canopy Growth Stock

It’s been a tough year for Canopy Growth (NYSE:CGC), despite the firm’s much-cheered partnership with Constellation Brands (NYSE:STZ) and its dominance of the industry overall. CGC stock has been weighed down by overarching worries about the cannabis sector as well as concern about instability within the firm itself. Canopy Growth stock has the makings to be a great pot investment, but the firm carries a lot of risk. 

Sky-High Costs

The More CGC Stock Flounders, the Less Constellation Can Handle It

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One of the reasons CGC stock is so risky is the fact that the company is caught in a transitional period, a very expensive transitional period. CGC has been funneling money into research and development in preparation for “cannabis 2.0,” when Canopy Growth will launch lines of chocolates, beverages and vaping products.

Canopy Growth has been expanding its business, but the costs that come with doing so have started to make the owners of CGC stock nervous. According to interim CEO Mark Zekulin, the firm’s aggressive expansion will be complete at the end of this year, when CGC and its investors will reap the benefits.

Execution Is Everything

So far, the execution of CGC has been subpar. That is part of the reason why investors have lost confidence in Canopy Growth stock.  The firm struggled with production issues during Canada’s initial phase of legalization, a misstep that left a lasting impression.

However, CGC has another opportunity to prove itself this winter when consumable cannabis products will be legalized. 

CGC Has a Lot to Prove

This winter, the stage will be set for CGC to step up and prove its worth as a top cannabis stock. But it could also open the door for another misstep by CGC that would further erode investors’ confidence in CGC stock. The legalization of consumables, a market that Canopy Growth is primed for, is not the only big step forward that Canopy Growth will take this winter;  the firm is also expected to announce a new CEO by the end of the year.

CGC’s new CEO is believed to be likely to further align the firm with Constellation.  But more importantly the new CEO will have an opportunity to change Canopy’s corporate culture. While CGC has been relatively tight-lipped about former CEO Bruce Linton’s departure, it’s clear his leadership wasn’t taking the company in the right direction. In an interview with CNBC’s Jim Cramer, Constellation CEO Bill Newlines confirmed that Linton’s views and the future of the CGC brand didn’t line up, “Our board was uniform. We were unanimous that we needed a different leader to take us to the next phase of growth,” Newlines stated.

The new CEO could cause Canopy Growth stock to surge, especially if he or she can successfully navigate the next phase of legalization in Canada.

Legalization Concerns

Outside of Canopy’s own issues, CGC stock is bogged down by industry-wide concerns about the cannabis market as a whole. The first phase of legalization in Canada underscored how challenging it is to roll out a completely new legal market. The government struggled to keep up with licensing requests. That hurt legal marijuana businesses because their production was held up by paperwork logjams. 

With 33 U.S. states currently allowing medical or recreational marijuana, many are wondering how the American cannabis market will progress in the years to come. That’s a tricky question because, although polls show that the majority of Americans are on board with legal marijuana, the industry will probably still undergo a lot of scrutiny before lawmakers will approve legalization.

Part of the reason for lawmakers’ hesitancy is safety and the impact that legal marijuana has on the drug culture in America. A study by the University of Michigan showed that daily or near-daily use of marijuana among those in college has grown significantly in recent years. That’s a troubling finding, considering that the brain  grows into the early 20’s.

The study, done by the University of Michigan Institute for Social Research, said part of the reason for the uptick could be that the perception of the risk posed by cannabis has dropped significantly because marijuana has become more acceptable. 

This kind of data is likely to impact decisions regarding legalization, especially since the effects of long-term, regular marijuana use are relatively unknown. 

The Bottom Line

CGC can either sink or swim right now. While its partnership with STZ gives it a safety net, its next moves are essential to it winning back investors’ confidence and securing its place as a top marijuana stock.

Buying CGC while it lacks a permanent CEO and is heading into a major legalization milestone in Canada is risky.  But since Constellation appears to be driving the selection of the new CEO, I’d say it’s likely to be someone who’s up for the challenge. If you’ve got time and you’re comfortable with risky stocks, CGC looks like a good bet on the future of cannabis. 

As of this writing Laura Hoy did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/evaluating-the-risk-reward-of-canopy-growth-stock/.

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