Canopy Growth (NYSE:CGC) stock is down nearly 18% in early morning trading. It appears that it’s going to be a tough day for the cannabis company after a lousy earnings report.
And that’s OK. The stock, and the industry, is always a long-term play.
This isn’t to make light of the company’s earnings report. It was awful and far below expectations. A particularly garish part of the report was a whopping loss of $2.71 earnings per share (EPS). That was far below the 26 cents loss per share predicted by analysts.
What makes the report more concerning is that investors are far more focused on the financials of cannabis companies than they have been in the past. There are no more free passes. Cannabis companies are not profitable and investors are becoming impatient.
But even with that, I still say the report on Canopy is not all bad. And if you believe in the long-term growth of the industry, then as your mother says, there were going to be days like this.
The Demand Story May Be Better Than it Appears
The $78.53 million in revenue was roughly 10% higher on a year-over-year (YoY) basis. In fact it was higher than any quarter in 2019. That’s significant because while demand was far below expectations, it’s clear that demand still exists.
Throughout much of 2019, Canopy and other cannabis companies faced the vexing problem of being shut out from their home market. Even though Canada had legalized cannabis for both medicinal and recreational use, a series of regulatory bottlenecks delayed the opening of key retail outlets.
Then just as those bottlenecks were breaking up, the Covid-19 pandemic forced Canopy to shut its Tokyo Smoke and Tweed stores to retail traffic. And like all retailers, e-commerce could only make up so much of the shortfall.
Still, it just goes to show that the demand story is not all bad.
The Marathon is Not Even at the Quarter Mile Mark
I’m bullish about the long-term growth of the cannabis industry. And for investors who are patient, and invest in the right companies, I believe there will be a payoff at the end. With all that said, we are only in the first miles of this marathon. The novel coronavirus is just another obstacle on the industry’s path to profitability.
And while it’s true that not every company will survive, that should not be an issue for Canopy. The company had $2 billion on its balance sheet at the end of March. Much of that was due to the infusion of cash it received from Constellation Brands (NYSE:STZ) in 2018.
The company was rapidly burning through the cash it received from Constellation. But that situation changed when Constellation increased its investment. In the company’s earnings report, Canopy confirmed that Constellation exercised approximately 19 million warrants to increase its stake in Canopy to 38.6%.
And the interesting thing about Constellation’s investment is that if the global cannabis market reaches projections of $250 billion in the next 15 years, the cannabis market could easily be larger than the current market that Constellation competes in today.
The vote of confidence is further evidence that Constellation believes in Canopy’s ability to be a major player in the cannabis industry. One reason for that, of course, may be the cannabis-infused beverages that Constellation has helped create.
And as a way of hedging its bets, Constellation is effectively steering the Canopy ship. Canopy’s new CEO, David Klein, is the former CFO of Constellation Brands.
Attitudes are Slowly Changing
The cannabis industry illustrates the importance of managing expectations. In 2018, a company could just say they were a cannabis company and see its stock price soar. But since then, the industry has been beset by numerous problems, several of its own creation. That’s one reason why the Covid-19 pandemic is so unfortunate. It hit the market just as Canopy was starting to see revenue from its Canadian operations.
The United States remains the goal. But legalization on the federal level is still a way off. A study by the Pew Research Center shows attitudes toward legalizing marijuana are changing.
In the meantime, companies like Canopy will be perfecting their strategy in the Canadian market. And since money talks, it’s not hard to imagine that once Canopy and other companies start showing a profit, political will may change.
Be Realistic In Your Short-Term Expectations For CGC Stock
I was skeptical about the over-exuberance of 2018 cannabis stocks. I was bullish on what I saw to be an overreaction to 2019 cannabis stocks. Is 2020 the Goldilocks year? Maybe not. There’s likely to be more volatility. But at this point, investors need to look for quality. And Canopy is one of the strongest names in the sector that has strong corporate backing to get it through the rough spots. And with this sell-off, it’s trading at an exceptional price.
But don’t make the mistake of thinking Canopy is a short-term success. There’s no clear consensus on how smoothly the economic recovery will be. And it’s too early to tell if cannabis is going to be a defensive industry. The race to profitability is a long one. There is no shortcut, but Canopy has the resources to be there at the end.
Companies Mentioned in This Article
8 Biotech Stocks to Buy and Hold in 2020
Biotech stocks are far from a sure thing. However, towards the end of 2019 several stocks in the sector got a nice lift based on promising new drugs in their pipelines. One of the key ways to measure any biotech stocks is the depth of its pipeline. When a biotech company issues a drug, its stock typically gets a lift because, for a brief period of time, the company has exclusive rights to that stock.
But those rights only last for a period of time. And at that point, generic equivalents can enter the market. Since generic labels typically bring prices down, it can be harmful to the stock unless they have a continuous stream of drugs coming to the market.
And in 2020, the story of biotech companies has been the coronavirus. Several of the leading biotech firms are working either individually or in tandem with other firms to develop vaccines or antiviral therapies to help treat and eventually blunt the spread of the virus which remains foreign to our bodies.
So while a volatile market is typically a clue to stay away from biotech stocks, now may be an ideal time to jump into this sector. And we’ve identified 8 stocks that you can buy today and hold until the end of the year.
View the "8 Biotech Stocks to Buy and Hold in 2020".