For Canopy Growth (NYSE:CGC) stock, 2019 was a year to forget. Canopy Growth stock declined 21% for the year, but even that understates how disappointing its performance was.
After all, CGC stock fell sharply toward the end of 2018 and rose quickly at the beginning of 2019. Even with its year-end rally, CGC ended the year 55% below its 52-week high. After trading weakly at the very beginning of 2020, Canopy Growth stock is about 60% below its all-time high, reached in October 2018.
CGC could rebound in 2020, even if I’m not ready to turn bullish on it just yet. Canopy Growth still has a fortress balance sheet. The Canadian cannabis market should become healthier this year. The company can grow over the long-term, even if its growth might not be quite as strong as bulls hoped it would be fifteen months ago.
However, significant questions loom for CGC. And Canopy Growth will need to deliver a strong performance for the shares to do better in 2020 than they did in 2019.
Will CGC’s New Management Change the Company’s Outlook?
Investors cheered when Canopy announced last month that David Klein would be its new chief executive officer. Canopy Growth stock bounced 14% on the news, likely for two reasons.
First, Klein is coming from Constellation Brands (NYSE:STZ,NYSE:STZ.B), where he held the title of chief financial officer. Constellation, of course, owns a huge stake in Canopy. Klein’s hiring has raised hopes that the beer giant might acquire the shares of CGC it doesn’t already own.
But if Constellation doesn’t acquire CGC, the fact that Klein is an experienced and well-respected executive should be encouraging to the owners of Canopy Growth stock. And, given his experience as a CFO, he should bring much-needed spending discipline to CGC. Canopy, after all, still has 2.7 billion CAD in cash on its balance sheet after Constellation invested $4 billion in the company in 2018.
That said, it’s not clear what exactly Klein plans to do or what he can do with that cash. Valuations across the industry are at or near their lows. That might actually make it more difficult for Canopy to buy companies.
Sellers may not want to settle for a price that represents a discount to levels seen just a year ago. Investors may prefer that Canopy wait for a potential shakeout in the sector, rather than buying any companies now.
It’s likely that Klein will look to reduce CGC’s costs. And that may be positive for Canopy Growth stock, since the owners of marijuana stocks oddly decided to focus on profitability last year. But Canopy needs to spend to increase the sales of its branded products, and there may not be as much fat to cut as some may believe. Even if it cuts its cost, Canopy is a long way from profitability. For CGC stock to bounce this year, investors will have to be patient again.
Will Cannabis 2.0 Move the Needle for Canopy Growth Stock?
The optimism towards Klein’s hire already has faded to some extent. CGC stock has given back more than half of the amount it gained on the day his hiring was announced.
And there’s only so much Klein can do if demand doesn’t cooperate. So Canopy Growth needs so-called “Cannabis 2.0” products like vapes. beverages and edibles to boost its growth.
I detailed the importance of these Cannabis 2.0 products to Canopy Growth stock last month. The success or failure of those products should start moving CGC stock in the coming days. Retail stores in Ontario should receive the products starting this week, and they will begin to be sold online on Jan. 16.
According to The Financial Post, Canopy will only have two flavors of cannabis-infused milk chocolate available for the initial launch of Cannabis 2.0. But the company detailed its Cannabis 2.0 portfolio in a late November press release, and it will launch many more products in 2020.
These products aren’t going to suddenly catapult Canopy Growth into profitability. The revenue they generate won’t even contribute to its third-quarter results, since its Q3 ended on Dec. 31. But they will have an impact on Canopy Growth stock in the near-term.
Cannabis-infused food and beverages are pretty much the only catalyst that can offset the growth concerns which have plagued cannabis stocks for the past eight months. If demand for these products is strong early on, investors could become more upbeat about marijuana stocks. And as the largest name in the sector, CGC no doubt would benefit from such a development.
The revenue generated by Canopy’s food and beverages, meanwhile, almost certainly will be a point of focus on CGC’s Q3 conference call in mid-February. If Canopy — and the industry — can convince investors that its new products will drive strong growth in 2020, then the stabilization of marijuana stocks that occurred at the end of 2019 could turn into a rally in 2020.
Why Investors Should Be Cautious About CGC Stock
The issue at the moment is that there’s still not much evidence that Canopy Growth is going to capitalize on its opportunities. Klein’s hiring is good news, but the new CEO will have a lot of work to do. Cannabis 2.0 will expand the market, but CGC stock will still be expensive.
And Canopy Growth stock will not necessarily be the best play if the sector recovers. Aphria (NYSE:APHA) is delivering the profitability the market appears to be seeking. Aurora Cannabis (NYSE:ACB) remains the highest-risk name, but also the highest-reward play, among marijuana stocks. And for investors who believe that Canopy Growth is going to make acquisitions, the smarter play might be to look for potential targets whose shares would soar if they are acquired.
CGC stock is intriguing below $20. But it’s not as if its decline has been unjustified. There are real concerns and real risks when it comes to Canopy Growth stock. The company’s mission in 2020 will be to ease those concerns.
As of this writing, Vince Martin has no positions in any securities mentioned.
