Not long ago, Canopy Growth (NYSE:CGC) seemed like a sure thing. The company appeared headed for ultimate domination of one of the fastest-growing markets on earth and CGC stock was unstoppable.
So what could possibly go wrong? Well, quite a bit it turns out. The performance of CGC stock really does tell the story. Since April, the shares have gone down from $50 to $20.
Some of the problems include disappointments with the earnings announcements as well as the sudden termination of its CEO.
But then again, the whole cannabis sector has been under incredible pressure. Just look at the horrible charts for companies like Aurora Cannabis (NYSE:ACB), Cronos Group (NASDAQ:CRON) and Tilray (NASDAQ:TLRY).
The Good and the Bad
Now there are certainly nagging issues with the cannabis industry. One is that the legalization in Canada has been far from smooth, as there have been disruptions with the supply chain.
Then there are the problems with black market activities, which have taken market share away from legitimate operators.
Oh, and of course, it’s never easy to grow at break-neck speed. It not only takes huge amounts of capital but requires a maniacal focus on building a solid infrastructure. But unfortunately, for many cannabis companies including CGC, the management teams do not have much experience with scaling operations.
The recent announcement of preliminary earnings from Hexo (NYSE:HEXO) is a confirmation of those issues. The company not only said it would significantly miss expectations but that it would also withdraw its guidance for fiscal 2020. In other words, HEXO has little visibility on what to expect from the Canadian market.
All this is grim, right? Certainly. But hey, in such times – when there is the proverbial “blood in the streets” – there can be lots of opportunity for investors. The key, though, is to look at the highest quality companies. And yes, CGC qualifies.
One of the main factors is that the company has outsized resources. Of course, the company was able to snag a hefty $4 billion from Constellation Brands (NYSE:STZ).
Yet this relationship is more than just about money. There are major benefits with synergy. STZ brings global distribution, experience with marketing/advertising expertise. Then there is the leverage from a set of top brands like Corona Extra, Corona Light, Modelo Especial, Modelo Negra and Pacifico.
Granted, STZ management is clearly disappointed in the performance of CGC stock, but this really a positive. After all, now STZ has much urgency to get things back on track. For example, the company is taking the lead on finding a new CEO (an announcement is expected by the end of year).
Bottom Line on CGC Stock
There is a potential near-term catalyst for CGC; that is, the Cannabis 2.0 trend. This refers to the legalization of cannabis edibles, drinks and vaping products in Canada. All in all, this could mean a surge in demand for next year. Some estimates are that the market could exceed $1 billion.
But of course, investors are not focused on such things right now. Let’s face it, sentiment is at awful levels. The perception is that, well, there is no hope for the industry!
Yet I think this is far from reality. The cannabis market is clearly a long-term growth opportunity, especially as more and more countries pursue legalization. But again, the key is to invest in those operators that have the wherewithal to withstand the wrenching volatility. And CGC is at the top of the list.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.