What’s next for Canopy Growth (NYSE:CGC) stock? Shares in the pot stock tumbled after a disappointing earnings report May 29. But, despite tough times for the cannabis space in general, there could be good reason why shares may rebound in the near future.
How so? The company remains a “work in progress.” Yet, with Constellation Brands (NYSE:STZ) taking de-facto control and spearheading a much-needed turnaround, fortunes could soon improve.
What am I talking about? A more viable pathway to profitability. Add in Canopy’s clear edge against floundering rivals like Aurora Cannabis (NYSE:ACB), and you can make a bull case for this stock. While it has a few fleas, this remains one of the best ways to play the pot-legalization wave.
This is especially true when a major needle-mover could be around the corner. That would be the specter of U.S. federal-level legalization. With elections in the fall, political power could change hands in both the White House and in the Senate.
Granted, this does not guarantee pot legalization right away. However, increased odds of legalization could bring many investors back into the stock — sending shares higher.
So, should you buy CGC stock today? I wouldn’t go that far just yet. A potential boost from this long-shot catalyst remains months away. And right now, the success of the turnaround is what will make or break this stock.
Therefore, with this in mind, you may better off waiting a while before considering a position. Let’s dive in, and find out why.
What Do Last Week’s Weak Earnings Mean for CGC Stock?
Investors can look at last week’s poor earnings release in one of two ways. On the more bullish side, you can chalk up these weak results to short-term hiccups. As InvestorPlace’s Luke Lango wrote May 29, Canopy’s recent numbers may be a case of “near-term pain, long-term gain.”
In other words, the company is making big moves to turn things around. Focusing their efforts on just the most lucrative segments of the cannabis market, the company is becoming “lean and mean” — the perfect recipe for profitability.
On the other hand, though, you can also view the recent bad results as a sign that today’s share price doesn’t reflect continued challenges. In fact, that’s the view of Stifel’s Andrew Carter. The analyst, a long-time CGC stock bull, recently downgraded shares from “buy“ to “sell,” reducing his price target to $13.22 per share. As he put it in his research note:
“We believe course correction will be difficult, expenses will remain elevated, and catalysts for driving enthusiasm will be slow to develop necessitating a further re-rating for the shares.”
Weighing these optimistic and pessimistic interpretations against each other, it’s clear that Canopy has potential, but could continue to struggle in the near-term. In short, the recent selloff may not be over. However, while the underlying performance continues to be a mixed bag, a major game-changing catalyst could be on the horizon.
Could November’s U.S. Elections Mean Legalization Is Around the Corner?
In the week leading up to their earnings report, Canopy shares were on the rebound. From mid-May until just before earnings, shares climbed from around $13 per share to prices above $20 per share. Some of this was anticipation of blockbuster quarterly results, on the heels of Aurora’s better-than-expected numbers.
Also, another major driver was New York Governor Andrew Cuomo’s recent remarks hinting at pot legalization in the Empire State. Granted, this doesn’t mean much for CGC stock. And until pot is legal on the federal level, major cannabis names like this one can’t dive into state-level markets.
Nonetheless, with elections in November, things could change in a big way. If the U.S. Democratic party wins both the presidency and control of the Senate this fall, we could see major changes in U.S. drug policy. Presumptive Democratic nominee Joe Biden remains against federal legalization. But with his party largely supporting such changes, investors may bid up pot stocks aggressively post-election as the odds of legalization would vastly increase.
Weighing the Bull Case Against the Bear Case, CGC Stock Remains a Hold
The next year could make or break Canopy. If Constellation’s aggressive turnaround plan pays off, the company could be well on its way to profitability. If that happens, expect shares to rebound in a big way. However, don’t assume turnaround success is guaranteed. With analysts previously bullish on the stock changing their view, shares could continue to fall from here.
U.S. federal legalization is still another potential needle-mover. But, even this catalyst isn’t a slam-dunk. So with this in mind, it may pay to wait for shares to move lower before buying CGC stock.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.
