The pullback in the share prices of cannabis stocks has investors who missed the big rallies in the past year wondering if this is finally the right moment to start buying small positions in some of the top pot stocks in the sector.
Let’s take a look at Canopy Growth (TSX:WEED)(NYSE:CGC) to see if it deserves to be on your buy list.
Canopy Growth trades at $26 per share and has a market capitalization of $9 billion. That’s a lot cheaper than the $70 investors paid for the stock in early October last year and again in late April after the rally that occurred in the the first part of 2019.
Since then, however, the trend has pretty much been downward and Canopy Growth now trades at lows not seen since early 2017.
What’s going on?
The mood in the cannabis market is much different today than it was at the opening of the Canadian recreational pot market a year ago.
Investors bought into the hype ahead of the launch of legal marijuana sales to recreational users, sending stocks such as Canopy Growth to crazy levels, but the high quickly wore off amid supply issues, distribution problems, and pricing that has kept demand robust in the black market.
The sector tanked through the second half of October and continued to fall through the first three weeks of December last year. This coincided with a broad-based pullback in equity markets, which likely made the sell-off worse.
Bargain hunters sensed an opportunity and started picking up Canopy Growth below $40 and sent the stock back above $60 per share by the end of January. Another bout of profit-taking briefly hit the sector as reports started to emerge that some marijuana companies and their executives were not following the rules.
That lasted a few weeks before the next rally took the industry toward new highs, and Canopy Growth rode the wave to a market capitalization of more than $20 billion.
A focus on profits?
Valuations got out of hand and with the industry about six months into the recreational market, it started to become evident to investors that losses were not going to be a short-term event at most of the top players. In fact, spending to build scale as fast as possible in many jurisdictions and across several product lines continued at a crazy pace and the lack of profits began to cause concern.
Canopy Growth’s founder, chairman, and CEO, Bruce Linton, lost his job in early July after major shareholder Constellation Brands decided it was time for a change of leadership. Reports suggest the firm, which invested $5 billion in August 2018 to take a 38% stake in Canopy Growth, lost patience with the size of the losses.
Canopy Growth just announced that its new chairman will be the chief financial officer of Constellation Brands.
Should you buy Canopy Growth now?
Canopy Growth is a leader in the recreational and medical marijuana market in Canada and is positioned well to take a good chunk of the emerging medical marijuana opportunities in Europe, and potentially the U.S.
Canada is nearing the launch of its edibles market and the drinks component could be a big winner for the company. Constellation Brands is a global beer, wine, and spirits giant and the opportunity to market cannabis-infused drinks could drive revenue well beyond the levels targeted for the sale of cannabis products to smokers.
The stock still appears expensive based on its annualized revenue and lack of a clear path to profits, so I wouldn’t load up on Canopy Growth today.
However, investors who have a bullish long-term view of the cannabis sector might want to start nibbling on further weakness. Ongoing volatility should be expected, but there could be decent upside for those who can ride out the growing pains.
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Fool contributor Andrew Walker has no position in any stock mentioned.
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