The market has been on a rollercoaster ride over the past few weeks after the coronavirus from China and a nosedive in oil prices hurt investor sentiment. Very few stocks have avoided the steep drops and sudden pops that the market has dished out. Canopy Growth (NYSE:CGC) is no exception. CGC stock gained 7.26% on Tuesday but the market, rather than anything specific to Canopy, was behind that rise.
And on the following Wednesday session, CGC stock dropped nearly 6%. For that reason, I think it’s worth remaining cautious on shares.
Marijuana Stocks See Near-term Pain
It’s worth pointing out that marijuana stocks are unlikely to feel the same pain as other sectors of the market as coronavirus spreads. Airline stocks, for example, could struggle both in the near term as well as the long term because of the financial impact that reduced travel causes. For marijuana companies like Canopy, though, the risk is far less serious.
While there’s a near-term concern that coronavirus will keep people from venturing out to buy things like marijuana, that’s unlikely to make a sizable impact on the overall financial health of a company like Canopy.
With that said, if you believe in Canopy’s growth potential, now is absolutely a worthwhile time to start considering a position. That’s because CGC has been lumped in with the wider market as it starts to nosedive. After all, despite its recent rise, Canopy stock is still down around 38% so far this year.
Canopy Is a Risky Play
While I’d concede that Canopy perhaps doesn’t deserve its recent beating, I don’t think it’s a smart buy in any environment — let alone one with this much uncertainty. That’s because Canopy has yet to demonstrate that it can execute.
The firm flubbed not one, but two important Canadian legalization milestones despite having the backing and expertise of Constellation Brands (NYSE:STZ) behind them. Canopy’s link to Constellation is certainly a positive. Back in November, I noted that having Constellation’s guidance should help Canopy deliver moving forward.
But despite that, Canopy missed the boat on Canada’s “Cannabis 2.0,” when the nation legalized the sale of consumables, including cannabis-infused beverages. With the expertise of a beverage company to guide them, you might have thought Canopy would be on the ball this time around. Instead, the firm admitted that it wasn’t able to get its drinks on shelves as early as anticipated.
That’s problematic because it means one of two things: either Canopy is so disorganized that even Constellation’s know-how doesn’t help or scaling the production of cannabis-infused beverages while still turning a profit is difficult. Either scenario doesn’t look good from an investment standpoint.
Closing Greenhouse Doors
Another worrying development for Canopy stock is the fact that the firm is shutting down two of its western Canadian facilities. The company is also abandoning plans for a greenhouse in Ontario. The closures are the result of a slower-than-anticipated recreational market for cannabis according to a press release from Canopy Growth.
There are a few takeaways here. The first is that under its new management, Canopy appears to be focused on cost cutting. That’s a good thing, especially in such a volatile industry. But the second and more troublin, takeaway is the fact that demand isn’t as robust as many were expecting. That’s negative for the industry as a whole.
The Bottom Line on CGC Stock
Now isn’t a good time to make speculative bets on Wall Street. We’re likely to see volatility continue in the near term and until the impact of coronavirus is clearer, uncertainty will continue to cast a shadow over the stock market.
As the marijuana industry develops, I think Canopy will grow alongside it. Under new CEO David Klein’s guidance, the firm is doing what it needs to — trimming the fat and keeping focused on profit. The firm’s fourth-quarter results delivered an unexpected upside surprise, and management’s promises to focus on cost control were considered “a beacon of hope” by MKM Partners’ Bill Kirk.
However, I don’t think it’s time to jump on a Canopy rally just yet. Instead, I believe the current market conditions are conducive to buying quality blue chips whose share prices have been beaten down by coronavirus fears. Stocks like Canopy aren’t worth the risk. CGC stock will remain on my watchlist with Klein at the helm, but I’ll be watching from the sidelines until the coronavirus panic has faded.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.
