Can You Call It a Comeback for Canopy Growth Stock?

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After the savage repudiation of marijuana equities in 2019, it’s going to take more than a few days of upside by some of these names to convince investors this year is going to be markedly different. Yet, here we are discussing Canopy Growth (NYSE:CGC) stock gaining nearly 17% since the start of the year, and 21% last week. A nice start to the new decade for CGC stock.

Can You Call It a Comeback for Canopy Growth Stock?

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Moreover, what makes the rally in Canopy all the more interesting is that not all cannabis stocks are participating in early 2020 upside. For instance, Aurora Cannabis (NYSE:ACB) is still getting smoked — pun intended. One way of looking at this situation is that Canopy may be rallying for company-specific reasons. Not because it’s caught up in broader cannabis equity exuberance.

Still, distress remains over CGC stock. That much was clear following Constellation Brands’ (NYSE:STZ) earnings report on Jan. 8. Constellation currently has an equity stake in Canopy, an investment that analysts see as a point of concern for the maker of Corona and Modelo.

“We remain skeptical of the Canopy investment outside Constellation’s core competency with no clear path to generate any meaningful returns in the near term, in our opinion,” said Guggenheim analyst Laurent Grandet in a recent note to clients.

Is There Enough Good News for CGC Stock?

Canopy got a jolt earlier this month when the company said its opening five more of its “Tokyo Smoke” cannabis stores in Ontario — Canada’s largest province. That could be one sign that some of the issues that plagued the Canadian cannabis market last year are abating. But, the reality is that the legalization of recreational marijuana in that country was oversold.

It’s going to take much more than that for investors’ to have renewed faith in Canopy. However, something to consider with Canopy is Ontario’s liberalized store policy because its an avenue for the company to cement its already dominant market position.

Speaking of opening markets in Canada, the derivatives arena — including beverages and edibles — finally got the green light last October. It’s a competitive market, but one where Canopy should assert itself and use it as leverage for bolstering revenue.

CGC has some other benefits, including its Spectrum Therapeutics being the dominant purveyor of medical cannabis. Additionally, the company has $2.7 billion in cash, or more than 25% of its current market capitalization. By the standards of the cannabis industry, Canopy Growth is financially sound, though it’s not yet consistently profitable. And even with frothy valuation metrics, some make the case that there’s value to be had in CGC stock.

“We continue to think that the seeds for long-term value are present,” said Morningstar in a recent note. “With a normalized gross margin of roughly 40%, continued demand growth that will be fueled by the launch of cannabis 2.0 consumer-packaged goods in mid-December, and the continued support from Constellation Brands, we believe Canopy will see higher free cash flow amid rapid revenue growth and overhead cost leverage.”

The research firm has a fair value estimate of $45 on CGC, nearly double where the stock currently is.

Bottom Line on Canopy Growth Stock

Canopy has some protection in Canada because it’s a tough market for foreign rivals to enter. This indicates that further loosening of derivatives (drinks, edibles, etc.) and store policies could help the company and, potentially, investors. Additionally, the medical business remains compelling, too.

“Canopy also exports medical cannabis globally,” notes Morningstar. “The global market looks lucrative, given higher realized prices and growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Canopy.”

For 2020, CGC stock could get a lift from new leadership at Constellation and possible expansion into the U.S. The former is a given and the latter would be icing on the cake.

As of this writing, Todd Shriber did not own any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/cgc-stock-comeback-2020/.

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