The dreadful performance by marijuana stocks through the second half of 2019 has investors wondering if the sector should be avoided — or whether it now offers a great entry point to buy pot stocks at very cheap prices.
Let’s take a look at Canopy Growth (TSX:WEED)(NYSE:WEED) to see if it deserves to be in your portfolio today.
Wild ride
The stock price of Canopy Growth has certainly been volatile in the past couple of years. The stock trades at $25, which is pretty much where it was in early 2018.
Over the past two years, however, investors have watch the share price soar above $65 on two occasions, only to give the gains back in steep declines in the following months.
Canopy Growth soared in the fall of 2018 ahead of the opening of the highly anticipated recreational cannabis market in Canada. The troubled rollout of the new sector resulted in a plunge in pot stocks as investors bailed out amid a lack of supply and distribution problems.
In early 2019 a new surge of optimism came into the market, and by late April Canopy Growth was back at a new high. Unfortunately, a wave of disappointing revenue results from the industry set off another round of selling.
Canopy Growth saw revenue stall while expenses soared, which ultimately led to a change in management that surprised the industry.
What happened?
Canopy Growth’s founder, chairman, and co-CEO Bruce Linton was fired by the board in early July. Pundits pointed the finger at Constellation Brands, the U.S.-based global beer, wine, and spirits giant that had invested $5 billion in August 2018 to boost its stake in Canopy Growth to 38%.
Constellation Brands paid more than $48 per share in that transaction and the opinion among analysts was that the company wasn’t comfortable with the large losses and weak revenue growth at Canopy Growth. The beverage company initially installed its CFO as chairman and later made him the new CEO of the marijuana producer.
Upside potential
Canada just launched the second phase of its recreational cannabis market, allowing the sale of a broader range of products including edibles, drinks, and vapes.
Constellation Brands is working with Canopy Growth to develop and market cannabis-infused beverages. The company’s expertise and distribution reach should help Canopy Growth capture a significant share of the market. If the cannabis-infused drinks segment catches on with consumers, the stock could pick up a new tailwind.
Beyond Canada, Canopy Growth is positioned well to be a major global supplier of medical marijuana. It has distribution and production operations in Europe where countries are altering their marijuana regulations. Canopy Growth also has a strong presence in South America.
The biggest opportunity arguably lies in the United States, where Canopy Growth has an agreement in place to acquire Acreage Holdings in the even marijuana is legalized at the federal level. Acreage Holdings has established production and distribution operations in more than 20 states.
Should you buy Canopy Growth now?
The stock certainly appears more attractive at $25 per share, albeit risks still remain. Vapes are facing regulatory pressure after a wave of illnesses in the United States, and it’s too early to tell if the edibles and drinks markets will be as big as anticipated.
That said, investors who are cannabis bulls might want to start nibbling on Canopy Growth. The company is an industry leader and should be one of the few left standing once all the dust settles on expected consolidation in the market.
