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Wed, September 30 at 4:00PM ET

Slimmed-Down Canopy Growth Stock Is a Cannabis Winner

A shrinking economy means that, like it or not, Canopy Growth has to shrink has well

It’s no secret that Canopy Growth (NYSE:CGC) stock is down considerably on multiple time frames, including the past year. The ouster of longtime CEO Bruce Linton in July undoubtedly caused some shareholders to lose faith in the company. The spread of the novel coronavirus certainly added to CGC stock’s woes, too.

CGC stock
Source: Shutterstock

Has the new CEO, David Klein, instilled confidence in the investing community? It’s hard to tell, as recent events have put pressure on the broader cannabis market. The Covid-19 outbreak and the disappointment in Canada’s so-called Cannabis 2.0 certainly weren’t Klein’s fault.

It’s best just to examine the facts and see if Klein’s Canopy is taking steps to prepare for a long, hard road ahead in the cannabis market. If so, then a long position in CGC stock could generate sizable returns, albeit not necessarily within a short time frame.

Bigger Isn’t Always Better

Some folks choose Canopy over other cannabis companies because it’s one of the biggest in the space. There’s a certain comfort in buying these names because there’s usually a deeper capital reserve and wider brand recognition.

It might be counterintuitive, then, to consider Canopy a better company after some downsizing has occurred. Yet, investors should consider the concept that a bigger Canopy isn’t necessarily a better Canopy.

The coronavirus outbreak has forced many large companies to downsize their workforce and operations. This is generally done as a protective measure as there’s less capital coming in from product sales. The cannabis market certainly is no exception to this.

Or, to put it in the language of analysts: “The cannabis industry is currently entering a new period where companies are focusing on corporate governance and operational efficiency.” That’s how Ello Capital Chief Executive Hershel Gerson put it.

That was true pre-coronavirus and is even more true today.

Leaner Equals Greener

Can a slimmed-down Canopy be more competitive in a coronavirus-wracked world? Cannabis companies cannot control the virus or its impact on product demand. In contrast, expenditures are one of the few factors that these companies can control, at least to a certain extent.

Rather than view it as a bad sign, investors should interpret Canopy’s retrenchment endeavors as a smart move. Until demand for cannabis products picks back up, cost-cutting measures are an unfortunate necessity.

So, what has Canopy done specifically to trim its workforce and operations? To begin with, the company announced that will close down two of its cultivation facilities. Specifically, Canopy will shutter the ones located in Delta and Aldergrove, British Columbia. The company explained in a statement that those facilities “are no longer essential to its cultivation footprint.”

Additionally, Canopy scrapped its plan to build a facility in Niagara-on-the-Lake, Ontario. At the same time, the company reported that it will proceed with 500 employee layoffs.

These actions sent a message to the investing community that Canopy’s new CEO will focus on restraint rather than spending and expansion. CGC stock fell on the news of the facility closures and employee layoffs, but it’s possible that the market’s reaction was wrong.

By April, Canopy announced that it will cease its operations in South Africa and Lesotho. Plus, the company plans to shut down a Saskatchewan-based indoor growing facility. Moreover, Canopy reported that it will halt its cultivation operations in Colombia.

On top of all that, the company said it will stop farming hemp in the city of Springfield, New York. And in the same announcement, Canopy stated its intention to eliminate 85 full-time job positions.

These actions make a clear statement that going forward, Canopy wants to be a smaller-but-better cannabis company.

My Takeaway on CGC Stock

Many shareholders made a likely mistake when they sold CGC stock after hearing about these cost-cutting measures. They’re making the all-to-common mistake of thinking that bigger is always better. The fact is, a shrinking economy means that Canopy, like it or not, has to shrink as well.

David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarketsFinom Group, Benzinga and (of course), InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/buy-slimmer-cgc-stock-coronavirus-cannabis-winner/.

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