Few bear markets in Canada have been as brutal as the one that the marijuana sector suffered through. From the giants of the industry to smaller players, almost all marijuana stocks experienced massive growth when the sentiment about the industry was highly positive, and legal marijuana was expected to be the next best thing.
But when it became clear that marijuana companies in Canada would have a long and arduous war with the black market products that still permeate a significant segment of the Canadian market, the sentiment began to change. It triggered a long and considerable slump, which caused many marijuana companies to lose up to 90% of their valuation over time.
However, hitting rock bottom has its perks. Many marijuana stocks experience a spike in performance even when something moderately good happens in the industry, and that’s what is happening with Canopy Growth (TSX:WEED) right now.
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A fallen giant
Canopy Growth was one of the largest cannabis companies in the world at one time, and even though it’s still in the top 10 cannabis companies by market cap, it has fallen several steps. Several reasons exist, including a weak sector, government regulations, and the company’s own management and business model weaknesses.
One of the most significant internal weaknesses of the company is that, in the past, it has liberally used share dilution to raise the required cash. While this allowed the company to build its portfolio of products and facilities, that’s quite impressive, the long-term implications haven’t been in the company’s favour yet.
The stock has lost over 98.5% of its market valuation from its 2019 peak, when it traded upwards of $670 per share. Now, it’s barely hitting the double digits now. It was at low single digits a while back, but the news that the U.S. might decriminalize marijuana at a federal level triggered a strong bullish phase. The stock rose by about 200% in just two weeks but is already heading toward a correction phase.
The future
There is no doubt that the U.S. is heading toward federal decriminalization of marijuana. Two-dozen states have already legalized its recreational use, and commercial distribution is also permitted in most of these states. Still, the actual trigger, especially for producers in Canada (especially if they have a U.S. presence), would be the federal legalization of marijuana.
When that happens, buying Canopy Growth might result in significant short-term gains, but buying now may not be the best course of action. The stock may dip, and if you wait for the right time to buy, you can get an even more discounted price and capture a larger piece of growth than you would if you buy now.
Foolish takeaway
It’s important to note that most cannabis stocks in Canada might surge when the U.S. government legalizes cannabis, but for almost all of them, the growth will have two phases.
The initial sentiment-driven phase would push nearly all stocks up — some more; some less. Then, after a correction, there might be a second phase of growth for companies that have actually benefited from this legalization, as evidenced by their financials.
