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Canopy Growth Corp. Joins an Elite Crowd

Photo: Plantlady223. Licence: https://creativecommons.org/licenses/by-sa/4.0/ Source: https://commons.wikimedia.org/wiki/File:Young_cannabis_plant_in_the_vegetative_stage_01.jpg

Senior management and employees of Canopy Growth Corp. (TSX:WEED) showed up at the Toronto Stock Exchange February 1 to ring the bell to open the day’s trading.

There to celebrate both its new four-letter stock symbol, not to mention its success in the burgeoning global cannabis market, WEED joins an elite group of companies using four letters of the alphabet, not three, as is the common practice.

Lost among the fanfare of Canopy Growth’s new stock symbol, an ode to the weed it grows for medical marijuana users across the country, is the fact this elite crowd actually makes a darn good portfolio of stocks.

Joining WEED in four-letter territory are four stocks with market caps of $1 billion or higher.

The four-letter portfolio components

Company Sector 1-Year Total Return
Canopy Growth Healthcare 266.2%
Cara Operations Ltd. 

(TSX:CARA)

Services 7.5%
Enghouse Systems Limited

(TSX:ENGH)

Technology -14.5%
ONEX Corporation

(TSX:ONEX)

Financial 10.1%
Teck Resources Ltd. 

(TSX:TECK.B)(NYSE:TECK)

Basic Materials 529.0%

Source: Investing.com

If you’d made a $5,000 bet on each of these five companies a year ago, today, you would have $64.915 — an annualized total return of 159.7%. Of course, to have made that kind of bet would suggest you’re more suited to Las Vegas than investing. Nonetheless, it’s interesting to consider the “what ifs” of this portfolio in 2017 and beyond.

First, although there are only five stocks, they conveniently operate in five different sectors, providing a modicum of diversification. That’s a definite positive.

Now, let’s consider the two stocks that drove most of the growth over the past year.

Despite Teck’s huge bounce-back in 2016 — the company’s stock had three consecutive years of losses between 2013 and 2015 — the year ahead looks promising for the producer of coal and copper. That’s because commodity prices appear to have bottomed and are moving higher which should help Teck pay off its $7.6 billion in long-term debt. Its CEO thinks it could do this in 18 months, which would definitely be a catalyst for continued appreciation of its stock.

As for Canopy Growth, most everyone who follows investing in Canada knows WEED’s story as the world’s largest cannabis company. It’s been a great three-year run as CEO Bruce Linton acknowledged in its press release announcing the symbol change.

“From our beginnings in an abandoned chocolate factory, to our funding of research to our countless doctor interactions, we have always taken pride in putting people at ease to open the door to a more meaningful conversation,” said Bruce Linton, chairman and CEO of Canopy Growth. “Now, over three years later, we’re thrilled to be marketing WEED on Bay Street.”

Personally, I believe that one of the cigarette companies is going to buy Canopy Growth before it gets too big, and that’s going to keep the stock moving higher; maybe not 200% over the next 52 weeks, but the general trajectory is going to be upwards, especially the closer we get to the legalization of its recreational use sometime in 2018.

The only negative return of the bunch is Enghouse Systems, which operates in the enterprise software space and uses acquisitions as a big part of growing its business. While it’s not a stock I regularly follow, its 2016 financials suggest it’s a very solid and profitable company with a decent 1.1% yield.

Enghouse Systems’s 24% decline of its stock in 2016 had everything to do with an overheated valuation and little to do with the strength of its business, which delivered seven consecutive years of gains prior to stumbling this past year. It’s solid.

That leaves Cara and Onex, both of which I’ve recommended in the past.

I’m generally not a fan of private equity firms, because they tend to gut businesses, and not in a good way, but Onex founder Gerry Schwartz tends to do a better job at keeping things relatively intact. Long term, ONEX stock will continue to do well because the company knows how to allocate capital effectively.

As for Cara, I believe it will continue to grow by acquisition; there are still plenty of opportunities available in every part of the country — maybe not the size of St-Hubert, which it acquired for $537 million in 2016, but substantial enough.

As this elite crowd moves further into 2017, I expect good things to happen to all five stocks.

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Fool contributor Will Ashworth has no position in any stocks mentioned.

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