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Why Canopy Growth Corp. Has Been More Resilient This Time Around

Marijuana stocks have been pulling back along with the broader market of late, with Aphria Inc. (TSX:APH) leading the decline, off ~50% from its all-time high reached this January. Aurora Cannabis Inc. (TSX:ACB) and Canopy Growth Corp. (TSX:WEED) have also felt hungover of late, falling by ~40% and ~24% from their January all-time highs, respectively.

The most remarkable part of this recent downfall is that Canopy stock has been more resilient than its peers this time around, which is intriguing when you consider that it was one of the hardest hit in last year’s correction, which has since been dwarfed by the parabolic upward surge experienced in the latter part of last year.

A natural question that investors might be asking right now is this: what’s the reason for the difference in each stock’s magnitude of decline?

While there are many potential reasons for each stock’s decline, when it comes to the Big Three cannabis players, I believe there’s a correlation between the amount of recent acquisition activity and the magnitude of the percentage losses from the latest correction.

In many previous pieces, I warned investors that the recent acquisition activities by both Aphria and Aurora Cannabis appeared “rushed” to prepare for legalization day slated for summer 2018. Both deals were absurdly expensive, and in my opinion, poorly timed with no consideration for the value paid for each acquisition, which was made near the marijuana market’s peak level of euphoria. I noted that Aphria was my least favourite name in the entire marijuana space when combined with its planned U.S. asset divestitures.

I urged investors to be cautious with all marijuana stocks; however, for those keen on getting into the marijuana space, I preferred firms that have exhibited patience and have been inactive on the acquisition front following the late-2017 parabolic surge that saw many pot stocks more than quadruple in just a few months.

The management teams at Aphria and Aurora appeared to have been overly euphoric on the parabolic movement in pot stocks themselves. Meanwhile, Canopy remained focused on organic expansion initiatives rather than actively seeking out extremely expensive acquisitions at what I thought was bubble territory. This is why I favoured Canopy over Aphria or Aurora — and why I think Canopy shares haven’t been hit as hard of late.

Moving forward, I still think Canopy is the best bet for individual marijuana stock pickers; however, I’d only advise buying with the cash that you’re willing to part with, as there are still many risks and uncertainties that could easily shave off another +50% off all pot stocks as they stand today.

Bottom line

Many would agree that that marijuana industry consolidation is inevitable over the next few years; however, there are ample takeover targets that will likely be substantially cheaper once the industry has a chance to cool off, as it has almost every year. So, when it comes to M&A, it often pays dividends to just sit on your hands or walk away from a proposed deal if valuation is a concern.

Moreover, I believe there’s no rush to pull the trigger on M&A after a parabolic surge that saw many pot stocks more than quadruple in a few months. I’m sure Aurora shareholders didn’t appreciate being diluted in order to finance an acquisition, which probably would likely have been much cheaper if management had shown some patience.

Canopy CEO Bruce Linton and company are really the only Big Three executives who appear to be truly focused on long-term value creation in the nascent marijuana market. As such, Canopy remains my favourite long-term pick for those with the appetite for speculation.

For everybody else, I’d advise enjoying the show from the sidelines; at least for now.

Stay hungry. Stay Foolish.

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

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