Investors remain skeptical when it comes to cannabis stocks. And unsurprisingly, Canopy Growth (NYSE:CGC) hasn’t been immune. CGC stock has rallied from March lows, but it’s still down 25% year-to-date and near its lowest level in almost four months.
Let’s be honest: there are reasons for the trading frustration. The Canadian market in particular hasn’t responded the way bulls had hoped, even with the launch of so-called “Cannabis 2.0” products.
That said, I still believe the sector offers plenty of opportunity for patient investors. That’s why I put together the Cannabis Cash Weekly service: to show investors how to profit while waiting for the sector to turn.
And turn it will. The worldwide opportunity for legalized cannabis is too large for cannabis stocks to stay down forever. And when the sector does turn, I still believe that CGC stock will lead the way.
Short-Term vs Long-Term
The Canadian cannabis market has certainly disappointed investors in the short term. But as always, investors should take the long-term view.
And the factors pressuring Canadian cannabis revenue and profits are mostly short-term, fixable problems. Regulators have generally been slow in providing permits for retail locations, while the “black market” has been stronger than many predicted. That means lower than projected demand for legal cannabis.
That in turn has resulted in significant overproduction. Too much inventory leads to pressure on pricing and profit margins. And so the results we’ve seen from the major players like Canopy in 2020 have been far worse than many investors predicted.
But it’s important to remember that the short-term problems facing Canopy and other Canadian operators don’t reflect on the broader opportunity for cannabis worldwide. Again, the problems are fixable, and being fixed.
Companies including Canopy have already pulled back on production. Black market strength has been in part due to the fact that much of the legalized product just isn’t as good. Improved production techniques and fresher inventory will improve quality, while regulatory bottlenecks already are easing.
The problems with legal cannabis in Canada are primarily problems with the Canadian market — not with cannabis, or Canopy. Worldwide demand isn’t going anywhere. Investors shouldn’t let early disappointments in a single market color their view of that demand.
New Markets Coming
That being said, the short-term issues aren’t just limited to Canada. The opening of legalized markets worldwide too, has disappointed.
The most important market at the moment is the U.S. And there really hasn’t been much movement there. The farm bill signed in late 2018 legalized hemp, sparking a rally in cannabis stocks. But since then, there’s been basically zero political movement domestically.
That will change — at some point. It won’t be until 2021, at the earliest. But particularly in the wake of the coronavirus pandemic, federal and state governments have too many pressing priorities to keep cannabis illegal forever. The bipartisan consensus that led to the Farm Bill’s passage can and likely will re-emerge at some point.
And slowly but surely, we’re seeing movement elsewhere. Israel is moving in the direction of legalized recreational cannabis as Canadian companies (again, including Canopy) target its medicinal market. Governments in Europe and South America too, have seen decriminalization efforts.
Again, the short-term news hasn’t been great. The long-term opportunity however, remains.
Why CGC Stock Will Lead the Way
And Canopy is perfectly positioned to be a leader in the cannabis market, however it plays out.
The company closed its fiscal first quarter (ending June 30) with 2 billion CAD ($1.5 billion) in cash. That’s plenty of cash to invest in new markets — and acquire additional businesses. Meanwhile, many of its larger rivals are slashing their spend as they try and deal with worrisome levels of debt.
Canopy already is a leader in cannabis-infused beverages. It offers other Cannabis 2.0 products like edibles besides. Their cannabis products span the medicinal and recreational markets, with both high-end and value brands. No cannabis company in the world has the same breadth.
And even with industry struggles, it’s not as if Canopy’s results are terrible. In Q1, revenue increased 22% year-over-year. Cash burn improved significantly. The company is heading in the right direction, even if it’s doing so slower than shareholders might like.
As long as that trend continues, CGC stock will find a rally at some point. Put simply, patience will pay off.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
