Canopy Growth Stock Reflects the Paradox of Cannabis Investing

Canopy Growth (NYSE:CGC) stock was having a good month. The stock surged over 10% after the company delivered its fiscal third-quarter earnings report. One reason for investors’ optimism was that the results showed that the recreational cannabis market is starting to deliver on its promise.

The More CGC Stock Flounders, the Less Constellation Can Handle It
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But the gains were short-lived. CGC stock is below its pre-earnings level and has lost 11% in 2020.

This back-and-forth illustrates that while CGC stock may be one of the best of the cannabis names, it still faces an obstacle. Specifically, the United States continues to take one step forward and two steps back when it comes to legalization. And that’s  continuing to frustrate investors.

How Good Was Canopy Growth’s Earnings Report?

Here are some highlights from the company’s Q3 earnings report.

Its net income rose 49% year-over-year and 62% versus Q2 to 93.5 million CAD.  In addition, Canopy was able to bring its price per gram down to 7.23 CAD. And its loss per share came in at 35 cents CAD. Analysts are used to cannabis companies being unprofitable, but it was encouraging to see Canopy post a significantly lower loss than the 1.05 CAD per share it reported in Q2.

But when investors looked at the reasons why Canopy Growth was posting these numbers, they had to be even more encouraged. Its recreational marijuana sales were up versus Q2, while its  medicinal marijuana sales increased versus Q2  in Canada. Its overall overseas cannabis sales also increased.

However, not everything was good in the earnings report. The company did alert investors that it was still dealing with an abundance of supply. That is a fundamental problem which is still casting a long shadow over the industry. MKM analyst Bill Kirk noted that, since the end of 2017, Canopy has grown 115,000 more kilograms of cannabis than it has sold.

“Assuming Canopy ceased all growing operations AND maintained current market share,” said Kirk, “it would take (approximately) 2.5 years to sell this product in Canada.”

Canopy’s supply issues would be solved if marijuana was legalized in the U.S.. But that is proving to remain an elusive goal.

Marijuana Is Becoming an Election Issue

During the Democratic debate in South Carolina on Feb. 25, legalization of marijuana was a hot topic.  Vermont Senator Bernie Sanders, who is currently the party’s leading candidate,  quipped that he would legalize marijuana by executive order on his first day in office.

OK, that might not happen. But that would be music to Canopy Growth’s ears. At one point, the current administration appeared  to be signaling that it was open to legalizing marijuana. However, in recent months, President Trump has begun to echo the hard-line stance that was taken by past administrations. And so, his re-election would likely ensure that cannabis remains illegal under federal law.

Is Now the Time for CGC Stock?

Physics was never my best subject. However, I do remember the irresistible force paradox. That is the rhetorical question that asks what happens when an irresistible force meets an immovable object. And that’s an apt analogy for what is now happening in the cannabis sector.

Cannabis investors have had to endure a rough 18 months. First, cannabis stocks fell from their speculative highs of 2018. Then, the stocks muddled through 2019 waiting, and willing, the Canadian recreational market to open for business.

But if Canopy’s latest results are any indication, the market may finally be opening up. However even a company like Canopy Growth, which claims to have over $2 billion in total cash, cash equivalents, and marketable securities, is still waiting for the United States federal government to legalize marijuana.

I believe that the cannabis sector is an irresistible force that continues to gain momentum. However, right now it is facing an immovable object in the U.S. government. But as philosophers would say, the irresistible force paradox is flawed because those two objects could never co-exist. And sure enough, one of these will have to give. My bet, for now, is still on CGC stock. But investors may still have to  wait awhile.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


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