The Motley Fool

Why Canopy Growth Corp. Investors Could Get Smoked

Volatility has been off the charts for Canopy Growth Corp. (TSX:CGC) in the last few months; the company has been facing huge downside in the last week. There’s no question that the stock is risky and is not suitable as a long-term hold if you can’t stomach double-digit percentage movements in a given day.

The marijuana industry is emerging, and investors want a piece of this action; but be warned: if you jump on the marijuana bandwagon, you could get smoked.

Canopy, as well as other marijuana stocks, is in a huge tug-of-war between long and short traders. It’s no mystery that there are a ton of people who are bullish on the company as well as the new industry in general considering that legalization of marijuana in Canada is imminent.

More recently, there has been a record amount of short-sellers that have been betting the stock will go down further. The stock has bubbled up to ridiculous valuations, and there were pieces of bad news coming from all corners that stopped the huge upward momentum the stock had enjoyed for most of the year.

Which side should you be on in the long vs. short tug-of-war?

Canopy is a great business with a management team that is well positioned to be the industry leader once marijuana becomes legalized; however, there are still a lot of unknowns involved with owning the company or shorting the company.

Although Canopy appears to be in a bubble and is due for a further correction, I believe shorting the stock is just as reckless as going long in this stock for the short term. Traditional valuation metrics are not sufficient for small companies with the growth potential Canopy has, and there are way too many unknowns involved with the company right now.

Good news that is released for marijuana companies will send Canopy and its peers substantially higher, but bad news would send all marijuana stocks crashing much harder. The stakes are extremely high right now, but it appears that the stock is more likely to half than double at current levels.

If you’re a young investor looking to make some money from the emerging marijuana industry, then Canopy is a terrific choice, but make sure you only invest what you can afford. The stock is very volatile right now, and the long-term fundamentals may not be reflected in the stock as news that is released will control where the stock goes.

If you’re bullish on the marijuana industry, then you may want to pick up shares right now, but be sure you’re comfortable with waking up tomorrow morning and seeing that your shares are down by 40% or more, because this kind of volatility will be expected for the next year or more.

If you’re bearish on the marijuana industry or believe that the stock is in a bubble that is going to pop, you may feel like shorting the stock. But be warned: you could lose more than your original investment if you’re not careful. That’s a level of risk that I don’t think anyone should take.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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