Why I Changed My Mind About Canopy Growth Stock

Supply shortages and political issues have slowed the roll-out of legal pot in several of Canada's provinces

What little enthusiasm I had for Canopy Growth (NASDAQ:CGC) stock five months ago has gone up in smoke. Everything that could go wrong for CGC has gone wrong in the intervening months.
Co-founder Bruce Linton was ousted as CEO and from the company’s board in July by investor Constellation Brands after the Canopy’s dismal earnings report. A permanent replacement hasn’t been named yet, which is reason enough to avoid CGC stock.

Why I Changed My Mind About Canopy Growth Stock
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As for Linton, he was named executive chairman of Vireo Health International (OtherOTC:VREOF). The news sent those shares up 26% on Thursday. “This is a science-backed marijuana company that met my criteria for best practices and a valid methodology,” Linton told MarketWatch. “This struck me as a company doing a lot of good work that nobody knows about.”

CGC shares have slumped more than 20% this year, even with today’s run-up of 12%, underperforming the broader market represented by the S&P 500 index, which has gained more than 20% since January. Wall Street analysts have high expectations for CGC stock ahead of next week’s earnings report. Their average 52-week price target is $29, roughly 36% above where it currently trades. It makes me wonder whether they have been sampling the company’s products.

CGC Expenses are Skyrocketing

For one thing, CGC is spending money like it’s going out of style. Operating expenses more than threefold in the latest quarter 229 million CAD ($173 million) compared with the 73 million CAD a year earlier. GGC’s balance sheet also is weighed down with nearly 2 billion CAD in goodwill from the 26 acquisitions and seven financing deals the company has done in less than five years. The odds are good that CGC will have to write down some, if not all, of these acquisitions.

CGC sees better times ahead. The company expects its net revenue to achieve a 1 billion CAD run rate by the end of the fourth quarter of fiscal 2020. It plans to make positive EBITDA every quarter and positive net income within three to five years.

Unfortunately, the sun, moon, and the stars have yet to align for CGC stock.

Canada’s Pot Market Problems

Supply shortages and political issues have slowed the roll-out of legal pot in Ontario, Canada’s most populous province. As a result, Ontario residents have a tougher time finding a retail store selling weed than in other regions with far fewer people, like Newfoundland and Labrador. Industry officials are pressing the province to allow more retail locations.

The debut of sales of edibles, which have better margins than cannabis flowers, also isn’t going smoothly. Officials in the French-speaking Quebec, which includes Montreal, have banned the sale of any sweet edibles such as brownies because of their potential appeal to minors. The Cannabis Council of Canada, a trade group, among others, has raised objections to Quebec’s rules, the strictest in Canada, which include caps on THC that effectively outlaws vape pens.

The Promise of Canopy Growth Stock

The thesis for Canopy Growth stock is this: CGC is well-positioned to take advantage of the surging demand for cannabidiol or CBD, a compound derived from cannabis that lacks the THC, which makes users high. CBD has shown promise in treating various ailments, including Parkinson’s disease. CGC is planning to build a $150 million hemp processing plant in New York State, which will help it gain an edge in the market.

Meanwhile, Canopy is one of the four big Canadian pot companies that will report results for the quarter ended Sept. 30 this week and Street expectations aren’t optimistic. It could be a series of down sessions for cannabis stock prices already off almost 60% from recent highs in March.

“Investors are likely to be laser-focused on ‘timetables toward EBITDA profitability,’ which probably isn’t in the cards until 2020 or 2021,” according to Bloomberg Intelligence analyst Kenneth Shea.

In other words, never a dull moment.

As of this writing, Jonathan Berr doesn’t own shares of any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/why-i-changed-my-mind-about-canopy-growth-stock/.

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