Hold Your Nose and Buy Canopy Growth Stock

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Canopy Growth (NYSE:CGC) stock is down almost 10% since Bank of America downgraded the stock on Sept. 27. CGC stock is now down more than 54% overall in the past year. But investors need to understand more than just the downgrade headline.

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I can’t say with any certainty that things are going to get better for Canopy Growth stock in the next few months. But nothing has fundamentally changed about the long-term cannabis bull thesis. In fact, even in his downgrade note, Bank of America analyst Christopher Carey said Canopy is still a cannabis market leader.

The Downgrade

In his downgrade note, Carey made a decent case outlining Canopy’s near-term headwinds. He is projecting Canadian cannabis industry growth will flatten in the second half of 2019. At the same time, consensus Wall Street estimates are calling for double-digit quarter-over-quarter sales growth from Canopy. In addition, he said negative headlines related to vaping could continue to weigh on investor sentiment.

Carey downgraded Canopy from “buy” to “neutral.” In other words, he’s going to the sidelines for now, not calling for a mass exodus from the stock. In addition, he cut his price target for Canopy Growth stock from $46 to $27. That’s a big cut, but it still represents more than 25% upside from current levels.

Perhaps the most important thing about Carey’s downgrade is that it was full of caveats. He wanted to make sure investors understood that he still sees CGC stock among the market leaders in cannabis in the long term.

“To be clear, we still see Canopy as a long-term leader in an industry with a large and
growing Total Addressable Market (TAM), increasingly accessible as jurisdictions legalize
Cannabis,” he said.

That sure doesn’t seem like a call to go out and dump a stock that is trading 50% below his price target.

Other Analyst Takes

Carey’s relatively toothless downgrade got major headlines. Other recent analyst commentary on CGC stock flew mostly under the radar.

On Aug. 26, Seaport Global analyst Bret Hundley actually upgraded CGC stock from “neutral” to “buy” with a $31 target. Hundley said Canopy’s balance sheet differentiates it from other cannabis stocks, and its $2.3 billion investable cash pile is undervalued.

“Despite our belief that CGC’s cash pile will be used in a manner that creates value at a higher multiple, we use only a 2x multiple in our company cash forecast in order to derive our $31 price target in an effort to be appropriately conservative,” Hundley says.

More recently, Piper Jaffray analyst Michael Lavery followed Carey’s downgrade by reiterating his “overweight” rating for CGC stock on Sept. 30. Lavery said Canopy’s ability to grow its business in the near term without raising additional capital puts it in a much better position than cannabis peers, including Aurora Cannabis (NYSE:ACB).

“We continue to estimate a $250-500B potential long-term global cannabis market, with
a $15-50B near-term opportunity, and believe Canopy is well positioned in the sector,
particularly with US$2.3B in cash in an industry recently facing growing difficulty raising
Capital,” Lavery wrote in a note.

His $40 price target suggests nearly 75% upside for CGC stock.

How to Play CGC Stock

CGC stock investors first need to come to terms with the fact that 2019 has not played out as planned. They then need to come to terms with the fact that the global cannabis business will not just materialize overnight at no cost and with no bumps in the road.

Part of investing in cannabis over the next 10 years will be dealing with constant headaches. Anticipate regulatory and political hurdles. Anticipate negative (and positive) academic research headlines. You should certainly anticipate strong opposition to U.S. legalization. You should expect Wall Street upgrades and downgrades.

But at the end of the day, if you believe in the long-term potential of the global cannabis market, there’s nothing wrong with owning CGC stock. Its 50% drop in the past year says more about how naive investors were a year ago than it does about the company today.

Even the analysts downgrading CCG stock have seemingly nothing bad to say about its long-term outlook.

The cannabis bull case is as strong as ever, but it’s a long-term thesis. In my opinion, the best way to play CGC stock and minimize risk is to include it in a basket of other top cannabis plays, including ACB stock, GW Pharmaceuticals (NASDAQ:GWPH) and others. Once you have created your diversified cannabis basket, add to your positions on dips. Or just set it aside and forget about it for at least a couple of years.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/hold-your-nose-and-buy-canopy-growth-stock/.

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