When Canopy Growth (NYSE:CGC) stock hit $13.81 back in November, the sentiment in the cannabis sector was downright awful. It seemed like there was really no bottom. Just about every notable company in the space was under extreme pressure like Cronos Group (NASDAQ:CRON), Tilray (NASDAQ:TLRY) and Aurora Cannabis (NYSE:ACB).
But it may instead have been a real turning point — at least for CGC stock.Â Keep in mind that the shares have staged a nice rally, up about 45%.
Of course, there are still major issues with the cannabis market. The Canadian opportunity was overhyped. It also did not help that the Canadian authorities were not proactive in licensing new retail outlets or combating black-market activities.
But despite all these factors, I still think there is a bull case to be made for CGC stock.Â So, let’s take a look at some of the key reasons for this.
One of the most important advantages for CGC stock is its solid balance sheet. Consider that there is $2.7 billion in the bank. Thus, as other companies languish, CGC will be in a position to push more consolidation at low valuations.
Another key advantage is that CGCÂ has a diverse platform. For example, it has a 35% market share position in Alberta, which is the most developed cannabis markets in Canada. CGC also has a large medical business, which includes about 75,600 patients.
Going forward, though, it seems like a good bet that the company will look to cost cutting. After a string of acquisitions, there should be room for considerable restructuring.
Hereâs what Bank of America analyst Christopher Carey noted in a recent report: “[W]e think the time may be right for Canopy to take more decisive action to right-size costs for the near-term realities. Obvious areas include facilities either under-utilized or not producing, strategic spending, and sales and marketing.”
He currently has a $27.59 price target on CGC stock, which assumes 35% upside from current levels.
Last July, Canopy CEO Bruce Linton was abruptly terminated. The companyâs largest shareholder, Constellation Brands (NYSE:STZ), had lost patience with his performance. As a result, Constellation named David Klein, who is the firmâs executive vice president and chief financial officer, to the CEO position at CGC.
He not only brings strong financial skills â which will be critical in getting to profitability â but operational experience in core markets like the U.S., Canada, Mexico and Europe. Note that Institutional Investor magazine ranked him as a top CFO for the past three years.
CGC is at the stage for disciplined leadership. This means understanding how to build the right infrastructure and scale products.
The upcoming earnings report for Canopy will probably not be great. Klein will likely take this as an opportunity to announce write-offs and other restructuring moves. This is very typical for an incoming CEO that is pulling off a turnaround.
But this should not overshadow the potential catalysts. After all, Canada has legalized edibles, vapes, chocolates and beverages â a market that could be worth a couple billion. As for CGC, the company has been leveraging its relationship with STZ to develop new products for this opportunity.
In the meantime, there should be ongoing improvements in the permitting of new retail outlets, which should help with growth. And yes, there should be more action to deal with the black-market activities.
Finally, in terms of the long term, the prospects for cannabis look bright. More and more countries are liberalizing their laws. The U.S. is also showing signs â on a federal level â that there could be change as well. In other words, with CGCâs strong platform, as well as its partnership with Acreage Holdings and other core assets, the company is positioned to benefit from these trends.
Tom Taulli is the author of the book,Â Artificial Intelligence Basics: A Non-Technical Introduction.Â Follow himÂ on Twitter atÂ @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.