As Warren Buffett once said (paraphrased), buy when investors are fearful and sell when they are greedy.
And, I’m sorry to say, when I look at Canopy Growth Corp. (TSX: WEED), I don’t see any fear. I only see unabashed optimism. I think that investors are buying a stock based on a view from very rose-coloured glasses, and that it is essentially a very speculative investment.
The stock has come down from highs of over $13 at the end of 2016, but it is still pricing in a lot of the potential growth in the company, while seemingly ignoring the big risks inherent in it.
Here are my concerns:
Valuation
Back in February, the stock was trading at over 60 times earnings with no real earnings. Back in June, the stock was trading at over 40 times revenue, with still no earnings. Today, the stock is trading at over 37 times revenue, and, as of the latest quarter, the first quarter of 2017, the company had a net loss of $0.14 per share, so there are still no earnings.
So, while the latest quarter saw a 50% sequential increase in revenue and a 191% increase in year-over-year revenue, the market and the company is still in its infancy, and so the risks associated with it remain high.
And once these companies are valued based on actual fundamentals, the shares can go down just as fast as they went up.
Competition
Aurora Cannabis Inc. (TSX: ACB) and Aphria Inc. (TSX:APH) are just two examples of competition. As the industry evolves, many more may attempt to enter the playing field, altering the dynamics of the industry.
We can only guess as to where the business model will settle and as to the margins we can expect for this business, what kind of profitability we can expect, and what shareholder returns we can expect.
Uncertain regulatory framework
Legislation regarding marijuana production, distribution, and use that is in the government’s proposed cannabis bill is still uncertain, and challenges remain.
Pioneers don’t always survive as new industries evolve
We do not know how things will shake out, so another good strategy with marijuana stocks is to buy a basket of these stocks to diversify the risk of one of them going bust, which does happen with companies that are in an industry that is in its infancy, such as this one.
In summary, it is not easy to value such a company when there is so much uncertainty and so many unknowns. The point here is that while the stock could be higher years from now, we are really speculating.
So, I would be patient with these shares and sell when the market is buying. If the shares crash and burn, re-evaluate.
Sometimes boring is better.
