Prior to the vaping crisis, publicly traded cannabis companies like Canopy Growth (NYSE:CGC) were already under fire. Due to a series of disappointing earnings performances from the industry as a whole, the sector printed much red ink. Unfortunately, CCG stock was no different, with shares declining precipitously since May of this year.
But with the inclusion of reportedly vaping-related lung illnesses, the case for CGC weakens considerably. For example, in the one-month period between mid-September and mid-October, shares dropped nearly 28%. Coincidentally, this was the time when the vaping illnesses transitioned from isolated incidents to a nationwide epidemic.
And on paper, the situation today appears almost comically bearish for Canopy Growth stock. According to The New York Times’ ominous “vaping illness tracker,” we have 1,299 cases and 31 deaths. Two recent fatalities in Minnesota drove up the tragic tally.
Thus, under any rational approach, CGC stock is a name to sell. At the onset of this health scourge, Canopy announced that they were about to launch vape products in Canada. According to Canopy CEO Mark Zekulin, our northern neighbor’s “regulated environment” should be the difference maker.
Unfortunately, the markets had other ideas. And Canopy Growth stock wasn’t alone in the malaise. Rival Cronos Group (NASDAQ:CRON), which many analysts consider a superior cannabis investment, suffered steep losses in the aforementioned time frame. It too joined Canopy in the race to vape.
Of course, what’s particularly problematic for CGC stock is the earnings picture. With the honeymoon phase over, investors want to see hard numbers. They’re not getting it. And with the vaping epidemic, they might never get it.
Yet I believe this pessimism is misguided and here’s why:
CGC Stock a Victim of Association
One of the pivotal reasons why the vaping crisis has been painful for Canopy Growth stock and its peers is what I would call investigating agencies’ shotgun approach. Without a clear culprit, anything and everything is suspect. That presents a worrying narrative for any vaping-related organization.
More critically, the Food and Drug Administration issued a warning about vaping flavors containing THC, or the cannabinoid responsible for giving marijuana its signature high. Unfortunately, because the public uses the terms marijuana and cannabis interchangeably, all nuance is lost. Thus, CGC stock has nowhere to go but down.
But in this case, the market is not acting rationally. This offers a contrarian opportunity for Canopy Growth stock, if you can stomach it.
First, the longer-term forecast for cannabis vaping both in the U.S. and Canada should remain robust. Under the language of the groundbreaking 2018 farm bill, hemp and its derivatives are federally legal. That means the popular cannabidiol or CBD is perfectly legal in the U.S., so long as it’s derived from hemp.
This is significant because CBD contains 0.3% THC content or less. If THC is truly the culprit behind the lung-illness epidemic, then CBD vaping receives a reprieve.
Secondly, I highly doubt that THC or any cannabis-derived material is the culprit. According to Harvard Health Publishing faculty editor Robert H. Shmerling, MD:
There seems to be general agreement that vaping (the term often used to describe use of e-cigarettes) is safer than smoking cigarettes. That said, vaping can cause mouth or throat irritation, nausea, and coughing, and the long-term effects are not yet known.
If vaping is safer than smoking, then vaping THC should be safer than smoking THC. People have been smoking marijuana for decades, if not centuries; thus, another reprieve for cannabis vaping.
Buy Canopy Growth Stock with a Patient Mindset
That said, the easiest and most powerful counterargument to my bullishness is investor sentiment. The market is the ultimate arbiter. If we forget this critical lesson, we risk having an unpleasant experience on Wall Street.
Put another way, I could be 100% correct in my analysis: cannabis has nothing to do with the vaping crisis. Thus, the hiccup in CGC stock is merely that. Over time, shares should move higher.
I’m confident in this latter point. However, I’m not so confident in providing a specific timeframe. Even if I have correct information, if everyone else believes in something different, then my analysis is a Pyrrhic victory. Ironically, I could invest truthfully and end up losing badly.
So, my take on CGC stock is this: if you’re dead set on buying shares, do so with a patient mindset. Going in with good information too early may be just as bad as reacting to bad information too late. But in the end, the fundamentals should win out.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.