As this investment story concerns a cannabis company, Canopy Growth Corp. (NYSE: CGC), I’ll do all I can to avoid puns like “cannabis stock high,” “cannabis company goes to pot,” “this weed is smoking,” “seed money” – but it won’t be easy. After all, for a certain age demographic, cannabis stocks conjure images of Cheech & Chong strolling the trading floor in crummy blue jean vests, surrounded by an entourage of admiring traders and a huge honking cloud of smoke. But here are the makings of a serious appraisal: the palpable reality of CGC stock as a growth opportunity.
Uh oh, was that another pun?
First, the reality: Cannabis stocks are fraught with uncertainty and CGC is no exception. This is definitely, definitely not to say that they’re risky or hands-off investments; more that the sector is relatively new, putting it on par with electric vehicles, space tourism and ride hailing services. We don’t have much data to leverage and can only say that right now, EVs are soaring and the likes of Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) are stumbling. Come back in a few years and it’s possible the sectors will pull up even or even swap places. There’s just not enough sector-wide share price and revenue history to meaningfully extrapolate.
But beyond this, cannabis itself is complicated by conflicting legalities. As of January, 11 states have legalized marijuana for adults 21 and over while 33 states allow it for medical use. Yet on a national level, marijuana remains illegal and this creates a sort of double jeopardy. No matter whether your state calls pot legal, banks are reluctant to accept deposits from cannabis growers – and even fewer offer traditional loans. CGC may be a Canadian company, but the federal factor still impacts its ability to expand its U.S. market.
A granular look at CGC stock and its numbers must be taken; we’ll run the numbers in a moment. But a proper discussion of its prospects demands a much broader lens. Read on, fellow investor, and you’ll see exactly what I mean.
For Cannabis Investors, Yes Is MORE
Readers know that I insist on parsing a stock in the context of both sector health (i.e., oil stocks bad) and the broader cultural/legal milieu. It’s a smart way to find the swan disguised as an ugly duckling. And rest assured, there is major cannabis news on Capitol Hill – all but buried in the tumult of a messy election season and an oppressive, ongoing pandemic.
I can’t say you read it here first, but you may be learning of it for the first time from Mr. Lou: Legislation in Congress is moving very close to legalizing marijuana nationwide. The Marijuana Opportunity, Reinvestment and Expungement (MORE) Act came within inches of a House vote on the week of Sept. 21. House Democrats have temporarily delayed it until the loop is closed on a stalled Covid-19 relief package, the concern being “bad optics” before Election Day.
But the MORE Act is almost certain to pass the House and enjoys some bipartisan support. In fact, the bill addresses concerns specific to pot commerce, including a new federal tax of 5% on sales. That money would be a boon to drained federal coffers and unlikely to cause voter backlash.
Senate Republican support remains dubious, but the election could shift the balance of power in that chamber. Depending on how that plays out, it wouldn’t hurt that California Sen. Kamala Harris, Joe Biden’s running mate, sponsored that chamber’s version of the bill. Regardless, pro-business conservative lawmakers could easily get behind the MORE Act, especially at a time when so many small businesses have been crippled and shuttered for good.
CGC Stock By the Mixed Numbers
With the analysts firms, I sense some disconnect that not only overlooks the recent Congressional activity but also sends a mixed message. Of the 21 analysts who have weighed in on CGC Stock, 14 call it a “hold.” Yet they’ve also set a consensus median price target of $17.60 per share over next 12 months. Last time we checked the price, CGC was trading at $14.07 per share. Last time we checked reality, a yearly return of 25% is some mighty fine coin. Did I mention that is the median expectation? Of course I did, because I like to repeat myself.
And since I like to repeat myself, let me once again repeat myself: The federal marijuana legalization landscape stands an excellent chance of permanent change in 2021. And if it doesn’t happen then, it will eventually. That could make CGC stock an excellent long play, though it remains to be seen whether the company has the goods to last.
And that, I acknowledge, causes me some concern. If you bought CGC in mid-2019, you’ve lost more than 70% of your investment. For all the promise of the sector, let’s not tilt too much to the side of “all cannabis companies will prosper.”
The Case For a Light Play and a Short Wait
So, why the big thud in share price?
A number of factors have conspired, including a Canadian market with less-than-expected demand, distribution problems, and the one-two punch of losses and light revenue. All this stoked the ire of Constellation Brands (NYSE:STZ), which owns a 38% stake in CGC and forced the ouster of co-founder and co-CEO Bruce Linton.
Perhaps the way to go, then, is this: Buy some shares of CGC stock while prices are cheap and analyst consensus is somewhat rosy. Then, wait on what shakes out in the halls of D.C. and the corporate offices in Smiths Falls, Canada. I’d say one quarter is just about right.
In the meantime, keep an eye on Constellation for signs of profit impatience and over-meddlesome behavior. To be sure, three months won’t be enough time for conclusive data in these three areas. But it will at least tell a more complete story that yours truly hopes will make for a positive update: one worth its wait in Canadian gold. GET IT?
Sorry, couldn’t resist.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.