Why Canopy Growth Stock Is Surging Once Again

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After a brutal year for marijuana stocks, it seems like the worst is finally over. The sector has enjoyed a massive rally since March. Many names, including Canopy Growth (NYSE:CGC) stock, have jumped 100% or more off their lows. Canopy, for example, bottomed at $9 during the crash and is trading for $20 now.

CGC Stock Doesn't Look Ready for a Post-Earnings Pop

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There are a variety of factors supporting marijuana stocks in general and Canopy in particular. In 2020,  the demand for cannabis appears to be rising meaningfully. And Constellation Brands (NYSE:STZ), which owns a large amount of CGC stock,  just gave Canopy a major confidence-booster by plowing fresh money into the company.

Constellation Raised Its Stake

In May, Constellation exercised some of its outstanding warrants on Canopy stock, giving Constellation a larger ownership stake in Canopy. The deal also gave Canopy 245 million Canadian Dollars of additional cash.

Following the transaction, Constellation now owns more than 38% of Canopy. And if Constellation exercises all its remaining warrants and convertible notes in the future, it would own as much as 56% of Canopy.

Constellation’s CEO explained its decision to continue putting more capital into Canopy, saying: “While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial… Canopy is best positioned to win in the emerging cannabis space and we are confident in the strategic direction of the company under David Klein and his team.”

This is, obviously, a reassuring move by Constellation. It’s no secret that Constellation and Canopy have had a rocky relationship. Constellation seemingly forced out Canopy’s old CEO and was unhappy with Canopy’s ambitious growth plans.

At one point, it appeared as if Constellation was going to sharply crack down on Canopy’s expansion plans. While Constellation may still have concerns about Canopy, it is confident enough to resume putting more capital into the cannabis company.

Is the Pandemic Having a Positive Effect on Marijuana Stocks?

One thing helping the marijuana stocks, such as Canopy, is the potential medicinal benefits of cannabis. While it may seem improbable, marijuana may help fight Covid-19.

According to a group of Canadian scientists, cannabis plants with a high level of active CBD may  reduce the ability of Covid-19 to infect cells. One scientist suggested that cannabis lowers infection rates by 70%-80%. According to the New York Post, “the results, printed in online journal Preprints, indicated hemp extracts high in CBD may help block proteins that provide a ‘gateway’ for COVID-19 to enter host cells.”

Of course, scientists will have to do far more research to confirm this assertion. One study does not provide irrefutable proof  of the phenomenon by any means. However, if the idea that cannabis can block the spread of the virus continues to gain credibility, marijuana stocks could surge. Such a scenario could be a game changer for the sector. And even if scientists can’t confirm that cannabis lowers COVID-19 infection rates, the perceived medicinal benefits of marijuana could lead to an increase in consumption of the drug in coming months.

Rising Sales Potential

Then there’s the drug’s relaxing qualities. The quarantine has given people plenty of down time, and the lockdown has been stressful.  Sales of alcoholic beverages have been strong since the stay-at-home orders started. It wouldn’t be surprising to see a similar surge in marijuana sales.

While cannabis stores are closed in some places since they have not been deemed essential,  sales of the drug could jump as economies start to reopen.

The Verdict on CGC Stock

Canopy is still a high-risk stock. But its long decline is finally over. For more than a year, Canopy’s stock seemingly only went down. But with the shares up more than 100% since March, the shoe is on the other foot; now the short sellers are worried about what is going to happen in coming months.

And Canopy appears to be on solid terms with its key backer, Constellation, again. A big part of the game in the marijuana sector for the foreseeable future is staying on offense. With so many companies facing liquidity crises, the strongest firms have a tremendous opportunity to benefit from the consolidation of the industry.

Canopy has plenty of cash to keep developing its products and brands in the coming months and years. The sector will remain volatile, and it won’t necessarily be smooth sailing from this point on for Canopy. But the survivors, including Canopy Growth, are starting to gain momentum.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/why-cgc-stock-is-surging-once-again/.

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