Canopy Growth Corp. (TSX:CGC) continues to rally to staggering new highs.
Let’s take a look at the current situation to see if the cannabis titan is still an attractive pick.
Election effect
Canopy was a $4 stock at the beginning of October. Today it is trading above $13 per share and now boasts a market capitalization of nearly $2 billion.
The rally has really picked up steam in the wake of the U.S. election as investors ramp up bets that Canopy could benefit from the wave of pot-positive votes in a number of U.S. states.
California, Nevada, Maine, and Massachusetts just voted to legalize recreational marijuana and join Oregon, Alaska, Washington, Washington D.C., and Colorado, where recreational sales are already permitted.
Florida, Arkansas, and North Dakota all voted in favour of legalizing cannabis use for medical purposes, bringing the total number of states that will allow medical use to 30.
The end result means nearly 25% of Americans live in states that will allow the recreational use of marijuana. That’s a huge potential market, and the reason why cannabis stocks are attracting so much attention.
One report suggests annual combined medical and recreational sales in California alone could reach US$7.6 billion by 2020.
Earnings boost
The biggest pop in Canopy’s stock has actually come on the heels of the company’s fiscal Q2 2017 earnings report, which came out November 14 and covers operations for the quarter ended September 2016.
Canopy generated net income of $5.4 million in the quarter compared to $3.9 million in the same period last year. Revenue came in at $8.5 million, representing a 22% increase over the previous quarter and 245% higher than fiscal Q2 2016.
The company sold 19% more product in the three months compared with fiscal Q1 and had 24,477 registered patients at the end of the quarter–up from 16,669.
The numbers are strong, but I’m not sure they justify the massive rally in the stock.
Growth outlook
Canopy is expanding its production platform. The company recently bought two Quebec-based licensed producers and has entered an expansion agreement with real estate developer, the Goldman Group.
Goldman will acquire new properties across Canada to set up new Canopy Growth production facilities and lease the sites back to Canopy. The deal fits Canopy’s strategy to be Canada’s largest vertically integrated producer.
International expansion is also gaining traction as Canopy focuses on large markets such as Germany and Brazil.
In a nutshell, the company is making good progress and continues to be the market leader in a very promising new industry.
Should you buy?
The stock is definitely on fire, and more upside could certainly be on the way, but investors should be careful buying today.
Why?
Most of the gains are tied to investors betting on the legalization of recreational cannabis in Canada and abroad. The Canadian government is expected to come up with legislation in the spring of 2017, but numerous issues have to be sorted out before the industry gets the green light, and delays could hit the pot stocks hard.
As for the United States, Canopy says it isn’t looking at that market right now because marijuana use isn’t legal at the federal level. Whether or not that will change is anyone’s guess.
Under the new Trump administration, the next attorney general will have to decide if it is in the country’s best interest to enforce existing federal law. Currently, the U.S. Department of Justice (DOJ) is taking a hands-off approach.
A pot-friendly attitude by the DOJ under Trump would certainly provide more support for marijuana stocks, but a hard stance could send the cannabis sector tumbling.
So, investors have to decide where they think things are headed when making a bet today.
What’s the bottom line?
The long-term potential for the industry is certainly enticing, and Canopy is enjoying its position as a leader in the early innings of the game.
As such, I can understand why contrarian types might want take a stake in the hopes of even greater gains. At this point, though, I would stay on the sidelines and wait for a pullback. Growth story or not, Canopy looks too risky at the current level.
