Is It Time to Buy a Cannabis Rebound?

The cannabis industry is down, but it isn’t out. So where should investors look if they hope to buy a cannabis rebound?

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It would be really nice to blame the current downward spiral within the cannabis industry on the pandemic, but that simply isn’t the case. Since legalization in October of 2018, the entire industry has gone down almost across the board.

Companies that soared from penny stock status to even triple digits within two years have now levelled out. Today, it’s hard to find even one stock trading about $30 per share at writing.

But if you’re looking into the cannabis industry, it’s important to note one thing: history repeats itself. The cannabis bubble has burst, but this leaves an opportunity for those willing to stick it out.

The cannabis industry is here to stay. Much like the internet, most cannabis companies will be eaten up and spit out. But a few will remain.

Buy big

As I say, there aren’t going to be many stocks left when all is said and done. It’s best for today’s investor to look at the biggest cannabis companies out there when considering a buy. Today’s market provides a cheap opportunity for almost every cannabis stock. But the best deals come from companies that have a few things going for them.

First, cannabis companies should have a significant partner. As we’ve learned from others that have failed, cannabis companies that have a partner in another industry provide cash when the company needs it most. Like right now.

Even if that means management has to bend to the will of that partner, it also means the company will see another day while others fall to the wayside.

Cannabis companies should also have production both underway, and in development. This is what’s creating so much of the debt we’re seeing from these companies. The industry is in expansion mode. Every single business out there has to grow, grow, grow. By that I mean literally in two ways.

The companies have to grow by building spaces around the world where cannabis could be sold, and it also has to literally grow pot. The more production, the better. Demand is not the problem right now, it’s simply getting it to the consumer the cheapest way possible.

Finally, when these companies expand they have to be in the United States. Sure, cannabis isn’t legal now. But it will be. Give it maximum one decade, marijuana will be legalized across the company and not just in a few states. When that happens, these big cannabis companies need to be set up for an explosion.

My choice?

I’d put my money on Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) before any of the other cannabis companies out there. Yes, I realize the company is going through huge pains right now. Most recently, Canopy Growth announced a loss of a whopping $1.3 billion during its latest earnings report.

The company is still in the midst of restructuring to gain back confidence in its company by both its investors and the general public. It’s laid off 800 employees, and even closed facilities to bring down costs. As of writing, the stock trades at about $22.75 — down more than 60% in a year.

But Canopy Growth also ticks off all the boxes. The company has a mega partner with Constellation Brands, with the company providing a US$4 billion investment in the company back in 2018. Since then, even as the company slumps Constellation has renewed its confidence in the company.

On May 1, management announced it would have a 38.6% stake in Canopy Growth, a huge increase from its 9.9% ownership back in 2017. Clearly, there is still confidence Canopy Growth has what it takes.

Canopy Growth has also expanded through the United States, and continues to do so even during the downturn. It’s now focusing in on Canada, the U.S. and Germany, where it believes it can be a leader in the cannabis industry.

If you’re going to be big, you have among those who believe that 2022, no matter who is in the White House, there will be legalization.

While it could be a few years away, Canopy Growth has what it takes within the cannabis industry to get things done. So if you’re looking to buy before a rebound, I’d say this is your best bet.

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 Amy Legate-Wolfe owns shares of Canopy Growth. The Motley Fool owns shares of and recommends Constellation Brands.

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