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Canopy Growth Stock Can Resist Any Cannabis Headwinds

At the onset of the cannabis boom, excitement was palpable and arguably justified based on the fundamentals. This was especially the case when, in 2018, Canada legalized adult-use cannabis, becoming the first G7 nation to do so. Essentially, a black market and therefore untaxable revenue source became a legitimate income stream. In theory, this emboldened the bullish narrative around Canopy Growth (NASDAQ:CGC) and CGC stock.

The Canopy Growth (CGC) website is open in an internet browser tab.
Source: Jarretera / Shutterstock.com

However, it was the shareholders that bought into shares before the pivotal news item above that benefitted the most. Shortly after the announcement, CGC stock went careening toward the weeds. A rather lengthy dead-cat bounce gave late-to-the-game participants something to cheer about. Unfortunately, this turned out to be head fake, with shares succumbing to severe pressure.

While I don’t want to dive into all the historical details, the bottom line for CGC stock was that the underlying business faces significant competition. Growing cannabis isn’t exactly rocket science. As well, backlogs with Canada’s marijuana business applications stymied momentum and imposed opportunity costs.

CGC Stock Narrative Seems To Be Repeating

I mention this because it seems like we’re repeating the same narrative. While on a year-to-date basis Canopy shares are up big, in the trailing month, CGC stock is down 6.5%. Also, from the $52.17 closing price on Feb. 10, Canopy has tanked 36%. Should investors get out and regroup later — perhaps buy CGC at a lower price down the line?

It’s a tempting proposition, something that our own Chris Lau mentioned. Among his arguments, Lau suggested that CGC stock “is entering a period of under-performance” due to market seasonality trends. This idea is echoed by Jefferies analyst Owen Bennett, who stated that Canopy shares are now “too expensive.”

Though Bennett wrote that Canopy deserves a higher valuation than its competitors, investors shouldn’t bank on the potential of federal legalization in the U.S. at such elevated prices. It sounds reasonable but is the approach a tad too conservative?

Consumer Habits Favor Core Business

On the other end of the scale, we have InvestorPlace contributor Will Ashworth, who takes a long-term bullish perspective on CGC stock. Primarily, Ashworth argues that consumer habits have changed in favor of Canopy’s core business, which should then later reflect in higher share prices.

He makes the case that in the Canadian province of Nova Scotia, the good folks there “spent a lot of money on alcohol and cannabis during the [third] quarter.” It’s a dynamic that has been on “rinse-repeat” cycle across North America and presumably much of the world.

According to a December 2020 Forbes article, online sales of alcohol boomed during the novel coronavirus-fueled lockdowns. Clearly, people wanted a method of escape but through a contactless delivery channel. In addition, health research indicates that alcohol consumption increased during the most difficult months of the pandemic.

Mental Illness Wave is Coming

Now, this is a controversial topic and much more research needs to be done. However, various health and medical publications have noted the potential for medical marijuana to address depression as well as relieve symptoms of anxiety.

Well, there’s a lot of depression going on these days. It’s not just about extreme depression leading to suicidal ideation, which of course is a massive societal risk. Rather, everyday folks — whether they have access to coping mechanisms or not — have endured at least some impact, whether that’s loss of social networks, insomnia, or mental strain from income loss.

However, because of the opioid crisis, many sufferers of mental health issues don’t necessarily want to go the pharmaceutical route. Despite its unsavory aura among certain social and political elements, cannabis has a long history of use as medicine. Therefore, it’s likelier that more people will trust this botanical approach rather than an exotic laboratory formulation.

Rough Economy Poses Challenges

Still, I don’t think the bullish thesis for CGC stock related to changing consumer behaviors is quite so clear cut. That’s because we still have a recession to worry about. And with the corrective spell we saw in the market on Feb. 25, there’s now a growing concern that we could see more weakness ahead.

Unfortunately, this is a headwind that prospective buyers of CGC stock can’t simply ignore. A weaker economy will most certainly affect the consumer at large, which then incentivizes black market cannabis sales.

Further, law enforcement agencies aren’t exactly in the mood for pursuing low-level marijuana cases. With the Biden administration supposedly on the brink of decriminalizing weed, would you want to risk life and limb over something that could largely become a moot point?

Nevertheless, the consumer demand for cannabis may be strong enough to overcome these headwinds. Therefore, I would take a modified approach with CGC stock — buy some now at the current discount but keep the powder keg dry for additional opportunities. They’re probably coming.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Article printed from InvestorPlace Media, https://investorplace.com/2021/03/cgc-stock-viable-for-new-normal/.

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