CGC Stock: Buy The Dip In Canopy Growth

Since mid-February, Canopy Growth (NASDAQ:CGC) stock is down 42%. Canopy is certainly not alone. In fact, the ETFMG Alternative Harvest ETF (NYSE:MJ) is also down 24% in that same stretch.

worker in flannel shirt planting young marijuana plant, symbolizing marijuana stocks and Cronos (CRON)
Source: Shutterstock

At times like these, it’s important for cannabis stock investors to maintain perspective. When an investment like CGC stock has essentially gone straight down for nearly three months, it’s easy to lose perspective on a great long-term investment.

I bought CGC stock on March 23, 2020.  It’s been a brutal couple of months, but the stock is still up 107% overall in that time. If you had told me to expect those types of returns when I bought the stock, I would have been thrilled.

Canopy has gotten only good news since I bought shares a little over a year ago. I don’t know where CGC stock will find a bottom. But any long-term investors can feel good about buying the stock at its current levels.

What Happened To CGC Stock?

CGC stock investors may be scratching their heads wondering why on earth the stock is down 42% in less than three months. Don’t overthink it.

Before the U.S. election in November of last year, CGC stock was trading at about $19. Joe Biden’s victory was a bullish catalyst for cannabis stocks. Investors believe Democrats are much more likely to push U.S. federal cannabis legalization. The Canadian cannabis market is great. But make no mistake, the U.S. market is the golden goose for any cannabis company.

After Biden’s victory, CGC stock surged to above $30 on extremely high volume. When Democrats surprisingly took control of the Senate as well in late January, CGC stock went on a run to new highs above $40.

Shortly thereafter, cannabis stocks got caught up in the Reddit r/WallStreetBets short squeeze frenzy. That horde of Reddit gamblers sent the stock soaring as high as $56.50 in mid-February.

Of course, CGC stock is down from that absurd level. What investors are witnessing right now is the “dump” part of the Reddit pump-and-dump. On top of that, I suspect there are some overly optimistic CGC stock investors who thought Democrats would swoop right in and instantly legalize cannabis. Even as a long-term cannabis bull, I’ve said repeatedly that U.S. federal legalization won’t come easily or quickly. Cannabis legalization simply poses too much of a threat to the existing U.S. pharmaceutical industry, which I suspect will fight it tooth-and-nail. The pharmaceutical industry also pours billions of dollars into campaign donations.

So, don’t be surprised if politicians aren’t particularly eager to jump on the legalization train.

CGC Stock Is Positioned For The Long Haul

CGC stock had no business at $56.50. It had no business at $40 or $30 either. Even at its current price of $24, CGC stock is up 54% in the past year. And it’s not necessarily cheap, either. Canopy shares still trade at 18.3x sales. But I would argue that the current valuation is justified given the company’s long-term growth trajectory.

Bank of America analyst Bryan Spillane is also bullish on CGC stock.

Spillane recently met with Canopy management and says the company is making all the right moves to position itself for the long term. In 2019, Canopy fired founder and co-CEO Bruce Linton and replaced him with former Constellation Brands (NYSE:STZ) CFO David Klein. Constellation is a minority investor in Canopy. I’ve long said Constellation could be a potential Canopy buyer in the event of U.S. legalization.

Preparing For U.S. Legalization

Canopy has been focusing on streamlining its existing Canadian business, building valuable cannabis brands and preparing for U.S. legalization. The company has a buyout deal already in place with U.S. cannabis producer Acreage Holdings (OTCMTKS:ACRHF) that is contingent on official U.S. legalization.

“CGC is ahead of many of its Canadian peers with a planned pathway with its arrangement with Acreage,” Spillane says.

In January, Klein predicted Canopy would be operating in the U.S. market “a year from now.”

Spillane says Canopy has all the ingredients to be an immediate market leader in the U.S.  in the event of legalization. In the meantime, it is building its brands and growing its business in Canada.

“We see strategic changes [and] its enviable cash and share position as all reasons to believe that Canopy can be a [long-term] leader in the cannabis sector,” Spillane says.

Bank of America has a “buy” rating and $36 price target for CGC stock.

How To Play It

I bought CGC stock a little over a year ago. Since that time, there has been nothing but good news about the potential for U.S. legalization. Canopy’s share price has more than doubled since I bought, and for good reason.

I don’t know if U.S. legalization will happen in 2021, 2022 or even later. But I do believe it will happen. In the meantime, I believe CGC stock is the best the cannabis industry has to offer for investors. Long-term investors shouldn’t sweat the 42% sell-off. Just buy the dip.

On the date of publication, Wayne Duggan held a long position in CGC.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market.

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