Year-to-date, Canada-based Canopy Growth (NYSE:CGC) stock is down close to 50%. On March 13, the CGC stock price saw a 52-week low of $10.30.

As many investors wonder what may be next for the cannabis industry, I couldn’t easily say that there’s such thing as a fundamentally safe pot stock. Therefore today, I’d like to discuss the outlook for CGC as well as the industry so that our readers may make a better-informed decision about their portfolio holdings.

Amid the global uncertainty, investing in the industry and CGC stock may be a rather risky proposition.

Marijuana Stocks Are Plummeting

So far in 2020, marijuana stocks have been plunging to new lows. For example, on March 13, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), a marijuana-themed exchange-traded fund (ETF), hit an all-time low of $9.6.

Producing cannabis is capital-intensive. As a result, pot firms make substantial initial and ongoing investments.

They are also vulnerable to supply and demand issues. Over the past year, a wide range of Canadian regulatory logjams have resulted in supply problems for CGC and its peers.

Plus, most of the demand for cannabis is currently limited to Canada where there is still a resilient black market. And analysts have been seriously questioning whether revenues of Canopy and its peers can grow much, given the weakness of the Canadian cannabis market. With losses continuing and revenues falling, shares of CGC and its peers have sold off.

We have recently been witnessing companies take drastic actions to curb expenses. For example, in early March CGC announced plans to decrease production levels. At present, the group produces enough legal pot to supply about 50% of Canadian demand.

However, it has about 20% of legal cannabis sales in Canada. Thus it has a substantial inventory balance.

Our regular readers would well remember that CGC stock has the managerial and financial backing of the alcoholic beverages giant Constellation Brands (NYSE:STZ). Earlier in 2019, the board had fired the co-founder and then-CEO Bruce Linton. I expect STZ management to encourage Canopy Growth to make further important decisions in the coming months, however painful they may be.

As CGC slashes capex and focuses on profitability, it is hard to predict what may happen to the stock price in the short run.

Possibilities of a Global Recession

In the past few years, most cannabis companies in Canada, including CGC, have been focusing on expansion at the expense of short-term profits. They have burned through a lot of money to expand. However, with that emphasis leading to a string of unprofitable quarters, the pain has become too much for these companies and their shareholders.

And now we have the COVID-19 epidemic. There may not be an obvious and immediate correlation between the viral outbreak and the cannabis industry. However, in a recent note, Eight Capital analyst Graeme Kreindler warned investors of potential supply chain issue.

Most of the specialized lighting equipment, as well as the vape hardware, is manufactured in China. He has highlighted how vaping sales are now quite important for most of these cannabis companies.

The Canadian government may well join a host of countries to introduce further “social distancing” measures or impose lockdowns in cities across the country. Then production and distribution channels would also be affected, potentially leading to decreased sales.

Finally, many investors are wondering if global economies may be headed toward economically difficult times in the next 12-24 months. Isa global recession is around the corner?

Especially when an economic slowdown knocks on the door, cash becomes the key in the race for survival in an already battered industry. CGC and most other cannabis stocks have continuous cash management problems. They seem to spend a lot of cash to make some money.

CGC Stock’s Price Action Urges Caution

In 2018, many investors regarded Canopy Growth stock as synonymous with the growth of the legalized marijuana industry. Early shareholders have gained considerable wealth investing in CGC stock. But more recent investors have lost money as they placed their bets on the growth of these pot stocks.

Over the past year, CGC stock has tumbled close to 80%. On Apr. 29, CGC stock reached a 2-week high of $52.74. It’s now trading around $10.5. In recent weeks, the share price kept moving lower after it announced the shutdown of its greenhouse facilities as well as hundreds of job cuts.

If you are an investor who also pays attention to technical charts, then neither the short-term nor the long-term charts look promising.

And if you’re an early investor with any paper profits left, you may want to lock in some profits here. At this point, CGC bears are in control.

Those considering investing in Canopy Growth stock may look to buy the shares if (and when) the stock is trading for $6 -$7. Then they should expect to hold the position for several years. In the meantime, expect  CGC stock to be very volatile.

When you consider that CGC stock still trades at a rather high price-to-sales (P/S) ratio of 13.5x, the share price may have to fall a lot more before it begins to stabilize.

Investor Takeaway on CGC Stock

The cannabis bubble has popped. Given the various serious industry headwinds and the current state of the global economy, it is hard to predict how many marijuana bulls might be left out there.

Indeed, 2020 or 2021 the latest may become the year when a number of cannabis stocks cease operations. I wouldn’t be able to predict which one(s) may go belly up, but I regard most marijuana companies, including CGC stock, as highly risky investments.

On a final note, there may be investors who are hoping that Constellation Brands, which holds a 38% stake in the company, could acquire the remaining shares of Canopy Growth. Given the question marks surrounding the industry and the global economy, I do not expect such an acquisition to happen in the coming weeks.

STZ management is likely to give CGC’s new CEO more time to structure the cannabis producer and possibly wait for a more opportune time to acquire the company. By then, CGC stock may be lower than it is now.

“Caveat emptor,” or “Let the buyer beware.”

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.