Amid a plethora of issues ranging from leadership changes to sluggish demand to margin erosion, shares of Canada’s biggest cannabis producer, Canopy Growth (NYSE:CGC), plunged in the second half of 2019, falling from over $50 a share, to under $14. But, there’s reason to believe that 2020 will be a big turnaround year for CGC stock.
In fact, there are three big reasons to believe that this stock can rally in a big way over the next 12 months, namely:
- Accelerated cannabis retail store expansion in Canada over the next few quarters, especially in Canada’s most populated province, Ontario.
- A pivot toward higher-demand, higher-margin cannabis 2.0 products — including vapes, drinks and edibles — in 2020.
- Favorable progress on U.S. legislation which could supercharge awareness of and demand for CBD products.
These three catalysts, coupled with the fact that CGC stock is reasonably valued at current levels with a ton of short interest, lay the groundwork for shares to potentially have a very strong 2020 showing.
Canada Retail Store Expansions
In 2020, those three big catalysts lay the groundwork for a meaningful rebound in Canopy Growth stock.
First, we should see a slew of cannabis retail store openings in Canada. For various reasons, some of Canada’s most-populated provinces were very slow in approving cannabis retail store openings in 2019, stifling demand. Importantly, data shows that the more stores a province opens, the more consumers spend on cannabis. For example, consumers in Alberta — which is known for having the most fleshed-out retail store network in Canada — spend, per capita, anywhere from over 2x- to nearly 5x as much as consumers in Canada’s three largest provinces (Ontario, Quebec, and British Columbia), all of which have much smaller retail networks.
Also of note, as British Columbia has aggressively expanded its retail store network over the past few months, cannabis sales in B.C. have roared higher.
The Western province is expected to continue to aggressively expand its retail network in 2020. So is Quebec. Most importantly, so is Canada’s largest province, Ontario, which is moving from a selective lottery system for cannabis store openings, to an open market. The number of cannabis retail stores in Ontario is expected to increase by about 10-fold this year.
Data shows that this rapid increase in retail stores will lead to a rapid increase in sales, which will boost Canopy’s sales trends over the next few quarters.
New Cannabis & U.S. Legislation
The second big catalyst for Canopy Growth in 2020 is the roll-out of new cannabis products, such as vapes, drinks, and edibles.
Surveys show that consumers are more likely to consume cannabis if infused into food or drinks. Those products are coming to Canada in 2020. As they do arrive, demand trends should improve. At the same time, these products are higher-margin and have less black market competition. So, the more drinks and edibles Canopy sells, the higher margins will go, too.
Third, there is potential for a big U.S. breakthrough with H.R. 5587 bill. In a nutshell, this legislation would allow companies to market CBD-infused products, something which they haven’t been able to do yet, because it would classify CBD as a dietary supplement, not a pharmaceutical. If this bill passes — and it just might — then you will start to see a bunch of CBD ads in the U.S.
Product awareness and demand will skyrocket, and Canopy’s newly launched First & Free U.S. hemp product line will gain significant early traction.
Short Interest is Huge
If those three growth catalysts do materialize in 2020, then CGC stock is optimally positioned for a big rebound.
That’s because this is a reasonably valued stock with a ton of short interest. That is, Canopy Growth stock is about as cheap it’s ever been, with a consensus sell-side price-target up around $27, and my price target up above $30. So, given the company’s long-term growth potential, most analysts covering this stock see a $20 price tag as fairly cheap.
Even further, a bunch of traders are betting against the stock. According to YCharts, about 50 million of the company’s 350 million outstanding shares are sold short. That’s all-time high mark. That’s also a lot of buying firepower, in the event that things do get better for the cannabis producer in 2020 and shorts are forced to cover.
A reasonable valuation, coupled with big short interest and some favorable catalysts on the horizon, is a recipe for success.
Bottom Line on CGC Stock
Canopy Growth stock had a rough 2019. This year could be a lot better, as fundamentals across the cannabis market materially improve and Canopy’s growth trends re-accelerate higher.
As of this writing, Luke Lango was long CGC.