When the Smoke Clears, Canopy Growth Stock Will Be a Winner

The selloff in the market and in Canopy Growth (NYSE:CGC) stock both continue. Markets plunged again earlier this week, and Canopy stock hasn’t been immune to the selling pressure. Now, shares trade back where they did in 2017.

When the Smoke Clears, CGC Stock Will Be a Winner

Source: Jarretera / Shutterstock.com

As I’ve argued over the past few weeks, investors need to keep their cool. This selloff has not been easy and certainly has not been fun. But over time, the economy and the markets will recover.

In the meantime, however, the volatility is dispiriting. However, as I’ve told subscribers of my Cannabis Cash Weekly service, in these environments investors sometimes have to step back and let the chaos play out.

Taking that step back, the opportunity in CGC stock becomes more clear. The long-term growth opportunity in cannabis is delayed — not eliminated. Canopy is the industry’s leader, and should remain so. In fact, it may emerge with an even stronger position.

Canopy isn’t going anywhere. This, too, shall pass — and when it does, CGC stock will rally sharply.

Canopy Cuts Back

Even before panic gripped the markets, it was becoming increasingly clear that the cannabis industry was headed for a shakeout. And that shakeout is almost guaranteed at this point.

In the sector as a whole, there is too much debt and too much capacity. Canopy chief executive officer David Klein made precisely that point in an interview on Feb. 14. “There’s not a lot of market demand for cannabis production facilities,” he told Yahoo! Finance. “There’s a lot of capacity in Canada and no logical buyers.”

That capacity is why Canopy announced earlier this month that it was closing two facilities in British Columbia. Furthermore, a greenhouse project in Ontario also is being canceled. Canopy isn’t throwing good money after bad.

Wall Street largely cheered the move — for good reason. It cuts Canopy’s costs, and in turn, speeds its path toward profitability. It also keeps the company from participating in “race to the bottom” pricing in wholesale cannabis.

It’s also a decision many other cannabis companies won’t be able to make.

An Industry Shakeout Looms

Canopy can make that decision because of its fortress balance sheet. In 2018, Constellation Brands (NYSE:STZ,NYSE:STZ.B) invested some $4 billion into Canopy Growth.

Much of that money has been spent. Canopy has made acquisitions, and spent heavily to build out production assets. In fact, it’s clear in retrospect that previous management spent too much. That’s a key reason why Constellation sent Klein — formerly its chief financial officer — to take the top spot at Canopy.

However, Canopy still has a good chunk of that cash remaining. As of Dec. 31, the company had 2.3 billion CAD (about $1.6 billion) in cash on its balance sheet. With losses coming down and long-term debt of just 536 million CAD ($373 million), the company is in excellent financial shape.

To put it simply, Canopy isn’t going bankrupt — but other producers will. There’s a real chance the equity in Aurora Cannabis (NYSE:ACB) gets wiped out, one reason I’ve long recommended even cannabis bulls avoid that name. Moreover, MedMen Enterprises (OTCMKTS:MMNFF) had to call off its acquisition of PharmaCann — likely due to financing worries. Its OTC stock price — just 19 cents — shows its desperate state.

The news is just as bad, if not worse, for many smaller, private operators. Those companies don’t have the cash to weather store closures or any short-term effects.

Canopy, however, does. And that positions it well going forward.

How CGC Stock Can Benefit

Certainly, a worldwide pandemic is not how anyone hoped the cannabis industry would become more rational. But it’s also likely that the response to the coronavirus from China simply will be the catalyst, not the cause. Given debt levels and overcapacity, many smaller operators were going to fail regardless.

That said, Canopy would benefit either way. In fact, a recent transaction shows how. Last week, Canopy and TerrAscend (OTCMKTS:TRSSF) entered into a loan agreement. Canopy is lending TerrAscend 80.5 million CAD, backed by TerrAscend’s assets.

The loan has an interest rate of 6.1% annually over the next decade — but that’s not the prize. Canopy also received more than 17 million warrants to buy TerrAscend shares, most of them at an exercise price of 3.74 CAD per share.

If TerrAscend, which currently trades below 2 CAD, posts a huge rally, Canopy will get its money back while also owning a nice chunk of the company at an attractive price.

If it doesn’t, though, Canopy has first claim on its assets, brands, and retail operations.

This kind of savvy deal is what Klein was hired to make. And it highlights the opportunities Canopy will have for the next few years. The company can patiently wait out the upheaval in its industry, and pick its spots to make investments that can drive significant value.

Of course, that’s exactly what investors should be doing right now. As they do so, they should give at least a long look to Canopy Growth stock.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/moneywire/2020/03/smoke-clears-cgc-stock-rally/.

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