Is the rebound over for Canopy Growth (NYSE:CGC) stock? Shares ripped from their November lows around $14 per share up to $25 in early January. But, with infused beverage launch delays, investors are getting impatient. Will Cannabis 2.0 be a game-changer for the floundering Canadian pot stocks?
The way things are going, Cannabis 2.0 could wind up being a bust.
Even after the recent rebound, CGC stock trades for less than half of its 52-week high of $52.74. But, there’s more potential downside from here. Thanks to its backing from Constellation Brands (NYSE:STZ), the company may not have the financial issues of its rival, Aurora Cannabis (NYSE:ACB). However, Canopy’s premium may start to come back to earth.
Let’s dive in, and see why now may be the right time to sell CGC stock.
Canopy’s Infused Beverage Fail
Why can’t Canopy get its infused beverage to market? According to the company, there are issues moving production from lab scale to commercial scale. As InvestorPlace’s Ian Bezek wrote on Jan. 23, Health Canada only provided licensing for the beverages in November. Perhaps not all the blame should fall on Canopy. On the other hand, this tight schedule didn’t stop it from touting the beverage launch late last year.
Canopy needs infused beverages to succeed. Without it, CGC stock lacks any real catalyst for 2020. When I last wrote about Canopy back in December, I discussed how Ontario cutting the red tape could benefit the company. This would help the company compete with black-market sellers in Canada’s largest province. But, I pointed out how oversupply issues may stretch into 2021. In other words, without infused beverage success, the best Canopy can hope for this year is to ride things out.
Thanks to Constellation’s strategic investment, the company has the war chest to weather the storm. But due to continued cash burn, this capital infusion is starting to dwindle. Canopy now has less of a financial buffer. In addition, another key element of Constellation’s involvement is dwindling as well: social proof.
Backing from a major consumer products company gave Canopy a status boost. Like with Cronos Group (NASDAQ:CRON), which is backed by tobacco giant Altria (NYSE:MO), this blue-chip vouching gave investors good reason to assign CGC stock a valuation premium.
But, investors may start taking a “wait-and-see” approach. Constellation has its work cut out trying to turn around Canopy’s fortunes. For now, the Constellation premium gives CGC stock a valuation well above its peers. Long term, this premium could deteriorate, sending shares lower.
As Canopy’s Star Loses Luster, Valuation Could Tumble
Based on analyst revenue estimates, CGC stock currently trades for 13.8 times fiscal 2021 (ending March 2021) sales. Here are the equivalent forward sales valuations for Canopy’s main peers:
Aphria (NYSE:APHA): 2.4 times FY21 (ending May 2021) sales
Aurora Cannabis: 3.8 times FY21 (ending June 2021) sales
Cronos: 22 times FY20 (ending December 2020) sales
Hexo (NYSE:HEXO): 3.2 times FY21 (ending June 2021) sales
Tilray: (NASDAQ:TLRY): 6.3 times FY20 (ending December 2020) sales
This comparison may not be apples-to-apples. The peers listed above have varying fiscal years. Many of these names have weaker capitalization than Canopy. Yet, while Canopy’s Constellation premium is not as high as Cronos’ Altria premium, I don’t believe any high premium is sustainable.
What does that mean? CGC stock may not fall to Aurora’s valuation levels. But a revaluation of Canopy could mean shares head back to their 52-week low.
Watch Out for Short Squeezes, But Sell CGC Stock
It may be a while until infused beverages even get a chance to move the needle for CGC stock. As investors grow impatient, Canopy’s star (courtesy of Constellation) is losing its luster. If investors start valuing Canopy on par with its rivals, expect shares to fall back to their 52-week low, or lower.
However, CGC stock remains ripe for a short squeeze. 21.4% of the float is sold short. Good news could send shares higher, as short-sellers cover their positions. But despite the short-squeeze possibility, the risk-return setup favors the short side rather than the long side with Canopy.
Bottom line: Watch out for short squeezes, but sell CGC stock, pronto.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
