It’s no mystery that marijuana stocks such as Canopy Growth Corp. (TSX:CGC) are speculative trades of late, and if you own shares of any marijuana stocks, then you’ve either got a huge gain or you’ve lost your shirt. Canopy stock has skyrocketed this year, but it has since seen some serious upside resistance over the past month. With such ridiculous volatility, how does the average investor buy shares for the long term at this level?
There are many pundits that believe the stock is extremely overvalued or in bubble territory, but what if the stock isn’t in a bubble? What if it’s a rare once-in-a-lifetime opportunity to get into an emerging industry early in the game? This scenario could be possible, and if government regulations don’t get in the way of the company’s ability to grow, then it the stock may actually be a great pick up.
How do you value Canopy?
Don’t bother trying to value the company based on the fundamentals right now, because you’ll just end up with numbers that show how ridiculously overpriced the stock is. These traditional valuation metrics won’t work in valuing a company that is growing as fast as Canopy.
It’s very rare to own shares in a company that is well positioned to be a market leader in an industry that is about to take off. Obviously, you’re going to pay a huge premium at current levels, but if things go as planned, you’ll profit big.
There’s just too many variables to know how much the stock is worth at a given time. On a new piece of news, the stock will drastically try to correct its price, and these fluctuations mean nothing when you take a look at the big picture.
How will Canopy keep growing?
The management team is looking to grow at the international scale; that’s why the company acquired German producer MedCann. We can expect more acquisitions like this in 2017, and each one will better position Canopy as a market leader.
When to buy?
If you’re an opportunistic investor who is bullish on the marijuana industry, then your best bet would be to wait until some bad news sends Canopy stock tumbling. But, of course, make sure that the bad news isn’t detrimental to the long-term profitability of the business, such as a regulation that restricts where the company can sell its product, like the restriction proposed by Donald Trump on American marijuana producers.
Most of the news that is released won’t have a huge fundamental impact on the long-term profitability of the business itself, but the stock will overreact regardless.
Make sure you’re comfortable with the investment losing half of its value, because it very well may, as there’s no margin of safety. But with big risk comes an even bigger reward.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette has no position in any stocks mentioned.