This broad market selloff due to the novel coronavirus has created long-term opportunities. The steep decline in cannabis stocks is one of those opportunities, and Canopy Growth (NYSE:CGC) stock remains the best play in the sector.
From a near-term perspective, there are risks. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ) declined nearly 14% last week. That diversified fund is a good proxy for sentiment toward cannabis stocks more broadly. And while it still trades above March lows, investors clearly aren’t rushing into the sector just yet.
From a broad perspective, that caution makes some sense. A piece of news on Monday reinforces the notion that there are going to be winners and losers in the marijuana industry. That shows that investors need to pick their spots, instead of just blindly buying any cannabis stock out there.
But that news, combined with other recent developments, also shows why Canopy Growth stock is going to be one of the winners — and perhaps the biggest winner — when normalcy returns to the industry.
Another One Bites the Dust
Overall, not all cannabis companies are created equal. Many have used enormous amounts of debt to quickly build their business. But now, with stores closed and continued delays in the rollout of Cannabis 2.0 products, that debt is becoming an enormous problem.
Additionally, heavy borrowing is why I’ve steered investors away from Aurora Cannabis (NYSE:ACB), which has a significant balance sheet worry. But as I wrote last month, debt elsewhere in the sector is a positive for Canopy Growth.
Collectively, there’s going to be a shakeout in the cannabis sector. And that shakeout will benefit Canopy in two ways.
First, Canopy can be aggressive. It can invest behind its brands, and build out its retail footprint. Many peers (including Aurora) will simply be trying to stay afloat, while Canopy will capitalize on their weakness.
Secondly, there will be assets out there available on the cheap as producers go bankrupt. Canopy closed calendar 2019 with 2.3 billion CAD in gross cash. And in turn, the company can spend the next 12 to 24 months creating a shopping list.
On Monday, we saw what will be a common occurrence: a cannabis company stumbling toward bankruptcy. iAnthus Capital Holdings (OTCMKTS:ITHUF) defaulted on its debt. And at the end of the day, iAnthus stock ended the day down nearly 62%.
iAnthus is a U.S. operator, so Canopy — for now — likely won’t be able to pick up any assets that shake free if the company enters a full restructuring. Acreage Holdings (OTCMKTS:ACRGF), however, could look to do so. Canopy has agreed to acquire Acreage if and when U.S. legalization arrives.
Whether or not iAnthus is the target is somewhat irrelevant to CGC stock, however. The point is that the company is the first of many that will enter, or at least near, bankruptcy. And in turn, those bankruptcies will leave a healthier, more rational market behind — a market in which Canopy will have both leadership and strategic flexibility.
CGC Stock Finds a Bottom
Meanwhile, despite last week’s performance, investors are starting to test the cannabis waters. Despite last week’s decline, the MJ ETF still is nicely above its lows. It rallied nearly 5% on Monday, and CGC stock was about the same.
Moreover, option premiums have skyrocketed in this volatile market. And so I’ve advised subscribers to my Cannabis Cash Weekly service to sell covered calls in Canopy Growth stock. Those premiums can offset some of the losses seen so far, and provide income while we wait for CGC to recover.
Anything can happen in this market in the coming weeks, but I do believe that recovery is underway. And in that context, there’s two important factors to note going forward.
First, CGC stock has outperformed. While the MJ ETF has bounced 25% from its lows, CGC has rallied about 50%. The intrepid investors focusing on the long-term bull case for cannabis, and looking to buy at the bottom, are choosing Canopy Growth as their target.
That’s a big deal in the short term — and good news in the long term. In any market, I advise investors to buy the leader in a growing market. It’s clear that, even in this wild market, investors are recognizing Canopy Growth as the leader in cannabis.
The second positive factor for CGC stock is that Constellation Brands (NYSE:STZ,NYSE:STZ.B), which owns a significant stake in Canopy Growth, has found a bottom itself. A fourth quarter earnings beat on Friday led STZ stock to eke out a gain even in a red market.
Moreover, Constellation spoke very favorably of Canopy Growth on its earnings call. Chief Executive Officer Bill Newlands called Canopy’s new cannabis beverages “game-changers.” He rightly said his team was “very encouraged” by moves made by Canopy CEO David Klein, who has added much-needed discipline to Canopy’s operations.
Again, the short-term might be messy. That’s why we are looking to profit from near-term volatility, instead of just riding it out.
But cannabis isn’t going away. It’s going to be one of the great growth stories of this decade, so investors shouldn’t let short-term problems affect that long-term view.
Even amid those problems, however, the evidence for Canopy Growth as the sector’s clear-cut leader only grows stronger. So does the case that there’s an enormous opportunity in CGC stock at these prices.
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.