Why Canopy Growth Corp. Has Been Lagging Lately

The initial hype surrounding Canopy Growth Corp. (TSX:WEED) was quite remarkable. It was the first pot stock to trade on the TSX, and for many investors, it was the only way to invest in marijuana without heading on the venture exchange. Canopy soared sky-high, and many investors made a ton of money over a very short period of time.

Fast-forward to today, and there are several ways for Canadians to invest in the booming marijuana industry. New stocks like Aphria Inc. (TSX:APH) and Aurora Cannabis Inc. (TSXV:ACB) started gaining the attention of investors, and eventually the Horizons Medical Marijuana Life Sciences ETF (TSX:HMMJ) was available for investors who were looking for looking for some diversification across the entire industry.

Inevitably, initial Canopy investors jumped ship to some of these new options, and the stock of Canopy started to lag its smaller cap peers like Aurora Cannabis, whose Aurora Sky greenhouse project has captured the attention of pundits and investors.

It also didn’t help that the company had its reputation tarnished by a tainted marijuana scandal by one of its recently acquired subsidiaries, Mettrum Ltd. The subsidiary was knowingly using banned pesticides on its products, and this resulted in a large amount of marijuana being destroyed. The scandal eventually evolved into a class-action lawsuit, and the stock of Canopy has struggled to rally ever since. Canopy is now down approximately 22% from its high on February 17.

Is the stock going to continue to be a laggard compared to its peers? Or is the stock a more a better “value play” at the $9 levels?

Bruce Linton, CEO of Canopy, made it clear that the use of banned pesticides will “never happen again”. He’s right, it won’t happen again, but don’t take his word for it. Once marijuana is legalized across Canada, there are likely to be stricter regulatory measures put forth by Health Canada that will require thorough testing of its product. I think it’s safe to say that we’ve heard the last of the tainted marijuana scandal, but will investors ever give Canopy a second chance?

I think the scandal, and the sell-off that followed may have permanently scared off a considerable chunk of weed investors. There are a lot of options out there right now, so there’s no real reason for investors to look back. As Warren Buffett once said, “It takes 20 years to build a reputation and [only] five minutes to ruin it.” Canopy has definitely tarnished its reputation with a lot of investors, and that has only accelerated the movement of capital from Canopy to alternative marijuana investments available to Canadian investors.

Insiders including the CEO, have been selling Canopy like crazy in recent months. I’d be very cautious if you’re thinking about investing in Canopy at current levels. Like all marijuana stocks right now, there’s going to be a lot of stomach-churning volatility in the months leading up to legalization. I’d recommend waiting on the sidelines because all the easy money has been made, and the potential rewards aren’t worth the risks right now.

The stock market as a whole may see volatility spike to even higher levels in the coming weeks with the French election, and the rising tensions between the U.S. and North Korea. These unrelated events could result in gigantic downward moves for Canopy and other pot stocks, so I’d be extremely cautious if you’re looking to invest in marijuana right now, as you may be able to pick up marijuana stocks at a much better price in a few weeks from now.

Stay smart. Stay patient. Stay cautious. Stay Foolish.

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

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