In an industry known for its green hue, investors hoped that the cannabis market would be spared the red ink. Unfortunately, this didn’t pan out. Instead, a huge drop in the benchmark indices on Wednesday relegated almost every publicly traded company into the doldrums, including sector leader Canopy Growth (NYSE:CGC). During the bloodbath, CGC stock dropped nearly 6%.
One of the biggest contributors to the fallout was the World Health Organization declaring the coronavirus from China a pandemic. Not helping matters is growing perception that, until recently, President Donald Trump’s administration was not handling the situation seriously. Recently, the number of cases in the U.S. exceeded the 1,000 mark. And in all, the worldwide cumulative total is nearly 126,000 cases at time of writing.
Supply Chain Issues
Intuitively, these matters don’t appear to impact CGC stock. However, Wall Street is worried that community panic could effectively quarantine retail sentiment — impeding discretionary purchases like cannabis. Furthermore, the coronavirus headwind on Chinese supply chains represent a direct hindrance on the legal marijuana industry.
First, most cannabis-specific vaporizer products are manufactured in China. As you know, vaporizers are among the platforms that are featured in the so-called “Cannabis 2.0” rollout in Canada. So a disruption in this category will be a repeat of the supply chain woes when the country first went green.
Second, the widespread panic has dramatically reduced inventory of protective masks and gloves. Obviously, this presents problems to production workers. Companies like 3M (NYSE:MMM) and DuPont (NYSE:DD) promised to boost productions, but the immediate chokehold could hurt for a while.
Finally, even mundane aspects of the business such as packaging risks disruption. And with China making almost everything you can think of, CGC stock subsequently took a beating.
A Pivotal Geopolitical Discussion May Help CGC Stock
Given the extremely negative response in the markets, some readers may wonder if my expectations for the longer-term picture has changed. Furthermore, others may ask if the thesis for CGC stock has been irreparably damaged.
However, my answer to both questions is a firm no.
Regarding the coronavirus, neither I nor anyone with whom I work with are downplaying the seriousness of this outbreak. But we must all realize that throughout American history, devastating diseases have plagued our communities. At best (or at worst), they impose minimal or transient disruptions. And I expect the same here.
As far as CGC stock is concerned, Canopy Growth is the segment leader. As a still-young market, we will see growing pains knock out many competitors. Typically, though, growing pains don’t permanently incapacitate the best and the brightest.
But in further analyzing the present market dynamic, one unavoidable factor has arisen: our — and the global economy’s — dependence on China.
Although the international community has robust trade relations with China, politics and national security interests have clashed. Back home, government officials from all sides of the ideological spectrum have raised alarms about China’s expansionary efforts. And with so many industries — and subsegments within those industries — are tied to the nation, it’s inevitable that the global community is seeking paths of diversification.
Over the long run, cannabis has the potential to explode higher as a largely North American economic engine of mutually beneficial interest. Additionally, the U.S. and Canada have forged an unbreakable friendship over the centuries.
Considering that cannabis is a massive job creator, the idea of U.S. full legalization has likely inched a bit closer to fruition. After all, being dependent on Canada is a much more palatable concept.
Food for Thought
Last December, the Trump administration proposed a plan to allow states to import prescription drugs from Canada in an attempt to lower drug costs. Ultimately, industry trade groups from both nations opposed the plan. For the Canadians, they worried that the proposal would hurt supplies for their own citizens.
Today, Americans are rapidly waking up to that reality.
Of course, any plan to create alternative supply chains will experience severe difficulty. China doesn’t just control specific drug supplies, but a wide range of them, including over-the-counter meds.
With so much in China’s hands, policy makers will likely consider not only relaxing cannabis restrictions, but encouraging their development — particularly for cannabis-based medicines and therapies. So from both an economic and scientific perspective, cannabis really is a homegrown, viable catalyst.
This won’t just be a net positive for CGC stock, too. Rather, it could foster a long-term revenue source unencumbered by geopolitical tensions; Something that we urgently need.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
