CGC Stock Was Once a Wall Street Darling. What the Heck Happened?
At the start of 2018, more than 20 months ago, Canopy Growth stock was trading at 25.
Eight months later, it was up at 50, bringing a relatively quick double to investors who held the entire time.
But today Canopy Growth (CGC) is back down in the 22 region—and trending lower!
So what’s wrong with Canopy Growth stock?
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First, the problem is not the cannabis industry.
The cannabis industry is booming, with most major Canadian producers and U.S. multi-state operators growing revenues at triple-digit rates year over year. In fact, the average rate of revenue growth of the 13 companies in my Cabot Marijuana Investor Portfolio is 265%.
The Cannabis Sector is Weak
But as we all know, stocks don’t track industry movements; that would make investing all too easy! The main problem for Canopy investors is the cannabis sector itself, where the Marijuana Index is now trading below where it was at the end of 2018—and you remember how low stocks were in December 2018.
Long story short, cannabis stocks performed superbly from the December low to their March peak. But since then, the tide has been running out, as investors who got on board too late sell out and take their losses.
This is the same story that happens with every hot sector. Early-birds make money (provided they know when to get out). Latecomers who buy near the top get burned.
Eventually, of course, the great fundamentals of the industry will win out, and the sector will climb out to new highs. But the timing of the next upmove is unknown.
Canopy Growth is Shrinking!
But the problem with Canopy Growth stock extends beyond the cannabis sector’s ups and downs. The problem with Canopy goes to the heart of its business. Revenues are shrinking—and that’s incredible in such a booming industry!
In the second quarter of 2019 (the company’s first fiscal quarter of 2020), Canopy saw revenues of $90.5 million, which was up 249% from the year before, but down 13% from the immediately preceding quarter. Analysts were expecting $109 million, so that was quite a disappointment.
Like most cannabis companies, Canopy lost money in the quarter—and that’s OK; most investors don’t expect cannabis companies to be making money yet.
But the board of directors does expect to see growth of revenues, and the revelation of the decrease in revenues made it clear why the board fired CEO Bruce Linton in early July.
They’re still looking for a replacement.
What Went Wrong
So what went wrong at Canopy?
The company grew plenty of marijuana, harvesting 40,960 kilograms in the quarter, 183% more than the immediately preceding quarter.
But it didn’t sell all that marijuana; much of it is waiting to be processed. And of what Canopy did sell, there was a greater weighting toward flower than in previous quarters, and flower has a lower selling price than oils.
So, short term, it looks bad for Canopy, particularly because every one of its competitors reported good growth for the quarter. But long term, I believe Canopy will be fine.
After all, the company has plenty of cash. At the end of June, cash and cash equivalents totaled $3.1 billion.
And Canopy has strong intellectual property, the value of which will eventually become clearer. Canopy now has 110 patents and 270 patent applications, covering everything from growing techniques to vaping technology. It’s been working on making CBD. And it’s been working on beverages. Remember, Canopy is 38% owned by Constellation Brands (STZ), and they know how to sell adult beverages.
Cannabis 2.0 is Coming
Looking ahead, December is when what’s been named Cannabis 2.0 begins in Canada; that’s when vapes, edibles and beverages containing marijuana will become legal. Canopy is working to be ready for all three of those new segments.
Management says that the company’s net revenue will achieve a $1 billion run rate by the end of the fourth quarter of fiscal 2020. That’s good.
Beyond that, Canopy has a deal to acquire U.S. heavyweight Acreage Holdings (ACRGF), which is currently active in 20 U.S. states, whenever that becomes legally possible.
And Canopy is currently converting an old vacuum cleaner factory in Kirkwood, N.Y—just over the state line from Pennsylvania—into a facility for processing industrial hemp (which is totally legal in the U.S. now) to make CBD oils, creams and consumables.
But the stock is still expensive. In fact, with a market capitalization of nearly $8 billion, Canopy is valued more highly than any other cannabis company on the planet.
And right now, with the stock trending down, the market is working to find out how low Canopy’s value can go before buyers step in to halt the slide.
What to Do with Canopy Growth Stock Now
Happily, readers of Cabot Marijuana Investor who followed my advice took profits right at the top, as I sold half our position for a profit of 696% last October. In fact, I sold half-positions in all six Canadian marijuana stocks I owned on that day, as the sector had gone parabolic and was due for a correction.
But I’m still holding a small piece of Canopy Growth stock, because this correction, like all corrections, will end, and I want my readers to be on board for the stock’s long-term profits.
But I can’t recommend the stock until it stops falling and starts rising again.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More
*This post has been updated from an original version.