Canadian pot producer Canopy Growth (CGC) has rallied along with other marijuana stocks, as investors and executives bet on wider legalization in the U.S. while the company’s sights on profitability become clearer. Does that make CGC stock a buy right now?
CEO David Klein, during the company’s fiscal third-quarter earnings call in February, said the company expects to enter the U.S. this year, echoing previous remarks. And the company said it expects positive adjusted EBITDA — or earnings before interest, taxes, depreciation and amortization — in the second half of 2022.
Also in February, Senate Majority Leader Charles Schumer and two other senators said they would make “consideration” of cannabis reform a priority, with plans to release a “discussion draft” on the matter early this year. Those plans would follow President Biden’s election victory in November, five more states voting to legalize, and the shift to Democratic control of the Senate.
Full legalization could allow big Canadian pot producers to storm southward into what would be the world’s biggest legal market after struggles at home. And it would enable Canopy to fully activate the cannabis infrastructure it has been assembling in the U.S. for nearly two years.
However, analysts have cautioned that the exact shape of pot-reform legislation remains unclear, and might not be as broad as bullish investors anticipate. Any legislation that benefits Canadian producers will also benefit U.S. rivals as well.
Canopy also continues to make aggressive cost cuts. CGC stock also faces greater competition from a potential merger between Aphria (APHA) and Tilray (TLRY). And while Canopy is the most valuable marijuana stock, it isn’t the biggest cannabis company in Canada. It had a market share of around 10.1%, Stifel estimated. Aphria’s was higher, at 12.2%.
‘When, Not If’ For CGC Stock
Klein, during the earnings call, said Canopy was working with Constellation Brands (STZ) — its largest investor — as well as lawyers and banks to determine how it might cross into the U.S.
Canopy, in 2018, landed a $4 billion investment from Constellation, the parent of Corona and other alcohol brands. CGC stock soared on that news. The company launched a website to sell CBD products in the U.S. — including those from Martha Stewart and Biosteel, a sports nutrition company it majority owns. Canopy also owns vaporizer maker Storz & Bickel.
Canopy also has an agreement in place to buy U.S. peer Acreage Holdings (ACRGF) once pot is federally legalized. But in June, it revised that deal in a way that appeared to reduce its financial commitments.
Klein said Canopy planned to bring more products into the U.S. through that infrastructure as regulations loosen up.
However, the company in December said it would close several production facilities in Canada, including its outdoor growing operations. The moves are intended to “streamline its operations and further improve margins.”
Canopy in December also said it planned to retire its stake in Canopy Rivers, an investment vehicle for the cannabis producer. In exchange, it will increase its investments in TerrAscend — a marijuana producer that has operations in Canada, along with some in the U.S. — and Vert Mirabel, a cultivation operation in Quebec.
And Canopy faces steeper competition if the $3.9 billion merger between Tilray and Aphria goes through. The combined company would be a multinational giant with an estimated $685 million in yearly revenue.
CGC Stock Fundamental Analysis: Still No Profits
Through much of last year and in 2019, CGC stock tumbled from the highs reached before Canada’s recreational legalization in 2018. But the postelection rally has given CGC stock a market cap of around $18 billion, making it the No. 1 marijuana stock by value.
However, the EPS Rating of Canopy Growth stock, a measure of profit growth on a scale of 1 to 99, is a mere 18. Earnings growth is a hallmark of top stocks. Like other big marijuana stocks, Canopy has lost money after investing in expansion.
Those losses, and disappointing sales growth, eventually led to the ouster of Canopy’s longtime co-CEO, Bruce Linton, in 2019, after Constellation Brands expressed disappointment in Canopy’s financial results.
In an effort to stem those losses, Klein, the former CFO of Constellation Brands, has laid off hundreds of employees and closed greenhouses.
“When I arrived at Canopy Growth in January, I committed to conducting a strategic review in order to lower our cost structure and reduce our cash burn,” Klein said in a statement last year.
Canopy Growth Stock Technical Analysis
IBD advises investors to buy stocks only after they set up in proper bases and rise above certain resistance levels, called buy points. That research shows that when a stock breaks past such a buy point after shaking out more skeptical investors, it could mean a longer run higher is ahead.
Shares are now at the highest levels since May 2019. But no pattern has formed, meaning no new buy point is in play.
CGC stock has a Composite Rating of 89 out of a best-possible 99, according to MarketSmith. Investor’s Business Daily research shows the biggest stock winners typically have Composite Ratings in the 90s.
Canopy’s relative strength line, which compares Canopy’s stock performance to the S&P 500, is at its highest point since the summer of 2019.
CGC Stock Vs. Other Marijuana Stocks
Among rival marijuana stocks, Tilray has a Composite Rating of 86, with an EPS Rating of 21. Tilray’s Composite Rating got a lift after shares jumped on the merger agreement with Aphria.
For Aurora Cannabis (ACB), those numbers stand at 33 and 1, respectively.
The most highly rated marijuana stock remains Innovative Industrial Properties (IIPR), a real estate investment trust that backs greenhouse buildings and other spaces in the medical marijuana industry.
It has a Composite Rating of 93 and an EPS Rating of 71. IIPR stock is trading near record highs, and is extended from a recent breakout.
Is Canopy Growth Stock A Buy?
Even as more strait-laced executives try to tighten up Canopy’s operations, the company is still losing money. It operates in an industry fraught with regulatory and legal hurdles. The economy remains badly shaken by the coronavirus pandemic. Shares are also no longer in buy range.
Bottom line: Canopy Growth stock is not in a buy zone, so it isn’t a buy right now, even as its Composite Rating improves.
However, investors who accept the risks and are nonetheless eager to get into marijuana stocks could buy CGC stock the next time it moves into a buy zone. Generally, though, IBD’s research shows, investors would be better off looking for stocks with stronger fundamentals and that are closer to their highs.
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