Canopy Growth Needs You to Call the Cops

Canopy Growth is re-opening a chocolate factory, hoping that edibles can make it money

As promised, Constellation Brands (NYSE:STZ) brought one of its own executives to fill the CEO chair at Canopy Growth (NYSE:CGC), the cannabis company it invested in back in 2018.

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Newly picked David Klein’s mission is to oversee Cannabis 2.0, a line of beverages and edibles infused with pot that became legal in Canada this month. Former CEO Bruce Linton hailed Klein as “a perfect pick.” Canopy shares are down 65% in just 7 months, leading analysts to ask whether it’s hit a bottom, and whether they should buy it.

Analysts agree. The short answer is no.

Chocolate Save Us!

The little town of Smiths Falls, Ontario, is celebrating the re-opening of its former Hershey’s factory to produce Canopy Growth chocolates. A press release on the opening says Canopy is “poised to lead the industry in bean-to-bar cannabis-infused chocolate.”

Canopy says it can produce 850,000 chocolates per month with the ability to scale higher. Deloitte claims there’s a $1.6 billion edibles market waiting.

Many of Canopy’s new products go by the name of Tokyo Smoke. They will be infused with either THC, the ingredient in marijuana that gets people high, or CBD, the ingredient that is supposed to relieve pain.

Wrong Dave

Next month that celebration will be followed by the arrival of David Klein, formerly Constellation CFO, as Canopy’s new CEO. He’s the wrong Dave. The right Dave would be the one from the 50-year old Cheech & Chong sketch, the illegal pot dealer.

That’s because so far, legal pot has been getting squished by the illegal variety — and that’s the case everywhere it has been tried. Legalization has taken the heat off illegal growers and distribution channels.

Illegal pot looks and tastes just like the legal stuff, and costs just half as much. It’s also more widely available, because there are few stores. Once a bud is lit, cops can’t tell whether it’s legal. Busting personal use of marijuana is no longer a priority.

The result is that legal growers, like Canopy Growth, have warehouses full of the stuff, which they can’t move. Illegal growers are cleaning up.

Stock’s Too High

Even with its precipitous fall in price this year, Canopy Growth is still extremely dear.

Over the last year, Canopy is down by one-third. But if you look at a two-year chart, it’s still up 16%. The numbers still don’t add up for anyone but the most ambitious speculator. The market capitalization on Dec. 13 is $7.3 billion, on sales for the first half of the year totaling $161 million.

Even assuming a doubling of sales for the back-half of the fiscal year, thanks to edibles, which are only legal in Canada, you’re paying 15 times revenue for a company that has lost nearly $1.9 billion over the last 12 months.

What Canopy Growth really needs now are cops. Cops in Canada, in California and everywhere else where pot is legal, busting farms, tossing dealers in jail, interrupting illegal supply chains on behalf of the legal ones.

That’s not going to happen.

The Bottom Line on Canopy Growth

Marijuana is much easier to grow than tobacco.

The current legal price is too high to compete with the illegal market. This is especially true when there’s no way to tell the difference between legal and illegal bud.

Canopy’s bet on Cannabis 2.0 won’t pay off until the illegal market is exhausted, or smokers decide they need a more unobtrusive high. If profits are in sight, Constellation can buy the rest of the company for much less than it’s trading at now.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/canopy-growth-stock-call-the-cops/.

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