Canopy Growth Corp. (TSX:CGC) had a terrific run in 2016, but the upward momentum faded towards the latter part of the year as short-term traders started taking profits off the table. Is this pullback a buying opportunity for long-term investors who want to get a piece of the high-flying marijuana industry?
There’s no question that Canopy is a risky name, and although the stock has calmed down recently, I believe the same magnitude of volatility seen last year will be back sooner than we think. The stock is full of short-term traders looking to make a quick profit, but I believe Canopy may actually be a terrific long-term investment if you can buy the stock at an attractive level.
In North America, marijuana sales grew a whopping 30% in 2016. We can expect similar amounts of growth going forward as the taboo on marijuana begins to fade the closer we get to a federal legalization. According to a marijuana market research firm, Arcview Market Research, sales of the drug are expected to grow to $20.2 billion by 2021. This is a 25% compound annual growth rate for the next four years, which is quite astounding.
Donald Trump is looking to restrict American marijuana producers from selling its product across state borders. This could mean a huge opportunity for Canadian producers such as Canopy, who could be a major supplier to many American states where marijuana is legal. Cowen Washington Research Group sees legal marijuana becoming a $50 billion industry in the U.S. by 2026.
Canopy is very well positioned to become a global leader in marijuana production. The company has been making many investments to ensure that its production capacity will be ready to go once demand for marijuana starts increasing over the next few years.
The marijuana industry offers growth that an investor can only dream of. Canopy, while a risky stock, actually has a well-run business that could see gigantic returns in a few years.
Should you buy the stock now?
If you can stomach ridiculous amounts of volatility and wouldn’t mind seeing your investment losing half its value over the short term, then Canopy may be a good pick for you. I still think there’s some downside from current levels. The stock will continue to fall by default if there’s no good news being released on a consistent basis. So it’s important to be patient and wait for any signs of weakness before buying.
Canopy is a speculative investment right now, and I wouldn’t recommend buying the stock in large amounts as that could backfire. There are long-term tailwinds that will drive the stock, but there are also short-term headwinds that could arise in the form of bad news. This headline risk could send the stock tumbling overnight, and if you sell, then these long-term tailwinds won’t matter.
I would just recommend that the average investor stay away for now, even though it’s tempting to have a piece of the marijuana industry in your portfolio.
If you’re an experienced investor who won’t sell after seeing a 50% decline in the stock, then you may want to consider buying it incrementally on any dips.
Stay smart. Stay hungry. Stay Foolish.
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.