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Canopy Growth Corp.: You Ain’t Seen Nothing Yet

Canopy Growth Corp. (TSX:CGC) is facing more volatility again.

The stock tanked over 12% in the past week. It’s not a mystery that the stock is full of short-term traders that can’t think past a horizon of a single week. These traders are going to start exiting the stock fast if no positive news is released on the company.

I believe Canopy is a fantastic business with the growth potential that investors can only dream of. Canopy is well positioned to become the market leader in the marijuana space, and it’s always a step above its competition. If Canopy continues to pull back, then I think it’ll be time to buy the stock because once marijuana is legalized, we could see earnings soar into the stratosphere.

While I’m bullish on the growth prospects of Canopy, I’m not a fan of its valuation, as I’ve made this very clear in my previous pieces on the company. I wrote about Canopy a week ago when it was over $10 per share. The stock is now closer to $8 a share. I believe there’s still more traders to be squeezed out of the stock before it becomes a safe investment to hold for the long term. Once the stock hits $6 per share, then it might be time to jump into the stock and ride the highs that are just around the corner.

The Canadian government is set to introduce legislation to legalize the use of marijuana next year, and there’s no question that Canopy is doing everything it can to be ready for the day marijuana becomes legal across the country. Its production capacity has increased internationally with the acquisitions it made recently.

Canopy is catering to both the medical and recreational marijuana markets with its branding. I believe Canopy has fantastic branding and marketing power. While many pundits believe that marijuana will be a commodity and there will be a huge price war between competitors, I believe Canopy is building a moat for itself to offset the pricing pressure brought forth by competition.

CEO Bruce Linton made it clear that the company is open to investing in R&D to develop and patent new strains of marijuana. This initiative could be a huge game changer and could make Canopy a high-growth pharmaceutical play and not a commodity play. There’s no question that there are a ton of ailments that marijuana can help with, and this R&D initiative could be another huge step Canopy has over its peers in the marijuana industry.

Going forward, Canopy is expected to continue to consolidate smaller marijuana producers and distributors across the globe. While the company reported very strong results in its last quarter, we may have just seen a small glimpse of what is really in store once marijuana becomes legalized.

The valuation is still quite steep, but the stock may actually be a good pick once the impatient traders jump out of the stock. Keep a close eye on Canopy, because next week the stock could be a screaming buy at about $6.

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.

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