Canopy Growth Corp. (TSX:WEED) and other cannabis stocks have been taking a plunge lately as short-term thinkers start dumping the stock for other opportunities. Although we’re closer to nationwide legalization, there appears to be a lack of hype compared to last year.
Earlier in the year, I warned investors that a correction was on the horizon, but other analysts strongly disagreed with my call. Canopy is picking up negative momentum, and it appears that no bottom is in sight. How much is Canopy really worth? And when is it safe for long-term investors to pick up shares?
Canopy has lost almost half its value since its November 2016 high, but the company still appears to be overvalued when you consider that it has a market cap north of $1 billion and a mere $10 million in revenue reported in the last quarter of 2016. Canopy is still bleeding cash, but Bruce Linton, CEO of Canopy, stated that investing heavily in building brands and capturing market share is more important than profitability at this point.
I’m skeptical about the building of brands because, in the end, cannabis is a commodity, and the company that can produce the most product for the lowest costs without sacrificing quality will be the top long-term winners.
If you’re still bullish on cannabis producers, then Canopy looks like a cheap contrarian play, but I still think there’s a considerable amount of downside ahead. It’s never a good idea to catch a falling knife, especially with the ridiculous amount of volatility.
When you consider the amount of uncertainty surrounding the cannabis market and the high volatility, it would be dangerous to consider being a buyer, even if shares hit the $5 or $6 mark. It’s very difficult to value such a speculative company, so I won’t even make an attempt at guessing what price Canopy’s true value should be.
What could stop the bleeding in cannabis stocks?
Canopy, as well as its peers, will continue to fall by default, even without negative headlines in the press. There’s headline risk with cannabis stocks, but, on the flip side, positive headlines could be the catalyst that could help cannabis stocks get moving into the green again.
I would stay on the sidelines at least until the negative momentum slows down. Once it does, if you want a branding play, you might want to consider Canopy as a speculative buy. If you’re like me and think cannabis is just a commodity, then you might want to look for a more efficient producer, like Aurora Cannabis Inc. (TSXV:ACB).
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Fool contributor Joey Frenette has no position in any stocks mentioned.