After a remarkable start to the year, the world’s best marijuana stocks are coming under pressure. A sudden change in investors’ hearts is causing widespread losses in some high-flying marijuana stocks and making long-term investors nervous.
According to a recent report in Bloomberg, the biggest factor that’s triggered the latest spell of sell-off is investors’ concern about the future profitability. Investors now have started to judge their investments by profitability instead of hype created after the Canadian legalization.
Of the five largest Canadian pot companies, only Cronos Group is expected to report adjusted net income by the final quarter of the year, according to Bloomberg data.
“There’s also the fear of writedowns related to inventory not ready for sale, which could be of low quality and ultimately not usable for either the dried flower or extraction market,” the report said, citing BMO analyst Tamy Chen.
Some companies — including Canopy, Aurora Cannabis, and Aphria — also carry high levels of goodwill due to their “aggressive pace of acquisitions at prices above book value,” increasing the likelihood of a writedown, said Bloomberg Intelligence analyst Kenneth Shea.
Cutting marijuana risks
In this environment of uncertainty and fear, it’s a good time for retail investors to review their investment portfolio and reduce risks in the marijuana space. One way to do that is stick with the strongest names, backed by deep-pocketed investors.
One name that stands out in this group is Canopy Growth (TSX:WEED)(NYSE:CGC), which has alcohol giant Constellation Brands as its main shareholder with about 36% of stake and a majority of its board seats.
Canopy is under pressure after reporting $323 million in the quarter ended March 31 that prompted Constellation Brands to force Canopy’s CEO departure. The move certainly made investors nervous and caused an approximate 19% plunge in its stock in the past couple of weeks. No doubt that development has clouded the short-term outlook for the stock, but I continue to see a long-term value in this top marijuana stock.
Canopy Growth is well on track to reach new highs due to the company’s solid growth plans. What makes Canopy different from other producers is its market size, capacity to ramp up production, and diversity of product offerings, alongside its international reach.
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Trading at $46.07, Canopy Growth stock is selling much cheaper than its April level when it crossed $70 a share. Investors who were waiting on the sidelines could take this weakness a buying opportunity.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Haris Anwar has no position in the stocks mentioned in this article.