Canada will soon be making history and become the world’s first industrialized country to legalize recreational marijuana. The wait for consumers is almost over. Cannabis for adult use will become available on October 17. For investors, the time is ripe to set their sights on the Canadian pot industry.
Many analysts liken the situation to the humble beginnings and eventual success of Silicon Valley-based companies. The stocks in the technology sector delivered astronomical gains. Investors are hoping for a repeat and to capitalize before the cannabis sector’s meteoric rise.
The main key now is to choose the weed stock that will not let your investment go up in smoke. If you’re one of the many who wants to seize the moment, Canopy Growth (TSX:WEED)(NYSE:CGC) appears to be the hands-down choice.
Many new companies are emerging because of the countless opportunities to develop products and offer services outside the mere cultivation and distribution of weed. But none among the industry players possess the strong suits of Canopy.
The key takeaways
Generally, investors are captivated by cash-rich companies. Many gravitate to Apple Inc. because of its deep treasure chest. In the cannabis space, Canopy is the tech giant’s counterpart. Both are awash with cash. Some are convinced that Canopy could become the Google of pot.
Because Canopy is cash-rich, it can most likely endure the ups and downs of the industry and survive. Further, it can beat the rest in capturing new markets and growth opportunities. Currently, Canopy has a hefty market capitalization of $14.156 billion.
Canopy is way ahead of the field not only in cash stockpile but also in infrastructure. Its 2.4 million square feet of licensed growing capacity will soon increase to 5.6 million square feet.
When full licences are obtained, the company would have the growth space to produce 500,000 kilograms of weed annually.
- Multiple distribution channels
Canopy is well positioned to serve not only the Canadian market but the bigger U.S. and international markets. The company has access to several markets, which makes it easier to peddle its weed products.
The company makes use of multiple sales networks, which includes private physical stores as well as online shops.
- Value for money
Pricing is always relative depending on the needs and wants of the consumer or investor. Price-wise, Canopy is a soon to be premium stock.
The stock price went through wild swings recently. At the beginning of the third quarter in July, Canopy opened at $38.40, but closed lower at $34.42 by month-end. Up and down fluctuations ensued until it breached $60 on August 27.
After five trading sessions on September 4, Canopy finished even higher at $68.83. The price settled at $62.75 to end the quarter.
It seems that Canopy is seeking its own level and that could be within the range of $62-65 without yet factoring in the momentous event that is about to come on October 17.
In Wall Street, Canopy (CGC) has greatly outpaced the U.S. stock market gains. The stock is up +105.95% year to date.
The risks of Canopy
There’s a faction who says that investing in Canopy or cannabis stocks is still highly speculative. They opine that prices of weed stocks are inflated since the basis is dependent on future success and not actually fundamentals or the track record of performance.
This group of skeptics thinks the euphoria will wane sooner than later. In the case of Canopy, the company will be spending millions of dollars more on global expansion. Further, the supply and demand outlook is not crystal clear.
They fear the bubble might burst in a similar fashion to the dot-com crash in the U.S. during 1995-2000. The information technology sector suffered a mishap then due to excessive speculation.
The final take on Canopy
Keep in mind that risks are ever present, especially when you’re investing in an emerging sector like cannabis. Despite the promising growth of the cannabis sector, you’re not insulated from incurring losses.
However, it’s hard to resist when a favorable buying opportunity presents itself. Canopy has the largest in all aspects of production capacity, cannabis inventory, and supply agreement volume. Canopy is also the wealthiest and best capitalized among the current crop of weed companies.
In addition, the partnership with alcohol giant Constellation Brands is in preparation for the creation of marijuana-infused drinks. This “new thing” in the beverage industry could be worth US$600 million in four years. Canopy will be at the forefront.
Taking into consideration the factors highlighted here, it would be safe to invest in the acknowledged industry leader. Purchasing Canopy at its current price of $63.09 is well justified given the potential upsides. The real downside would be foregoing of the occasion to buy when the defining moment of Canopy is at hand.
Iain Butler has stumbled upon a little-owned stock he believes could be one of the greatest discoveries of his almost 20 years as a professional investor.
This is your chance to get in early on of what could prove to be a very special investment recommendation. Think about how many investing trends you've missed out on, even though you knew they were going to be big. Don't let that happen again.
David Gardner owns shares of Apple. The Motley Fool owns shares of Apple and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. Fool contributor Christopher Liew has no position in the companies mentioned.