My Top Cannabis Pick

Cannabis is beginning to look a little more tantalizing to me. Read about my top pick Canopy Growth Corp. (TSX:WEED)(NYSE:CGC).

| More on:
Marijuana plant and cannabis oil bottles isolated

Image source: Getty Images

This recent market turmoil has resulted in what I can only describe as a tectonic shift in the Canadian cannabis sector. Investors have moved from a growth-at-any-cost, risk-seeking base of retail investors to a much more conservative, long-term group of investors.

Stock prices tell this story. In this article, I’m going to discuss why, despite more downside likely on the horizon, Canopy Growth (TSX:WEED)(NYSE:CGC) is now my top pick in this sector.

Economies of scale and cost advantage are important

As we’ve seen recently with the ports of massive supply glut of cannabis in the Canadian market, economies of scale have turned out to be quite the double-edged sword. Investors are now concerned about too much cannabis being produced on an ongoing basis. This structurally hurts the margins of producers such as Canopy.

The good news is that Canopy has done a much better job than its peers, in my view, of reducing production. Therefore, Canopy acted as the market leader, in this regard. Massive production capacity has provided Canopy with excellent unit economics at competitive costs advantage over its peers. However, this has also contributed to the supply glut we now have in the market.

As of the first fiscal quarter of this year, Canopy had approximately 2.5 years’ worth of cannabis inventory. To combat a growing inventory and demand implosion for all intents and purposes relative to previous predictions, Canopy wisely decided to trim its production capacity in a rapid way. The company was able to trim millions of square feet of production space and hundreds of jobs. The goal of Canopy was to become leaner and meaner in these uncertain times.

Long-term outlook is a big plus

In addition to these production moves, I also appreciate the focus Canopy’s board has had on moving the company toward profitability sooner than its peers. Canopy announced that David Klein, the former CFO of Constellation Brands, would become the company’s new CEO. Constellation Brands is a majority stakeholder in Canopy.

This move signaled a corporate focus on profitability and cost containment, away from a growth-at-any-cost model. This move was also applauded by some analysts who viewed the move as a “growing up” of an adolescent industry. I wholeheartedly agree with this sentiment.

These short-term changes carry long-term importance, in my view. Canopy has made moves that will ensure it retains a top spot in terms of quality in a sector which was previously valued on volume metrics. Profitability is becoming the priority (finally), and Canopy is in it to win it.

Canopy’s balance sheet is stocked with cash. The company’s path forward to a real positive cash flow is much cleaner and easier to see than most of the company’s peers. In a word, Canopy is the only real player in this space in Canada, in my view.

For investors with a long-term outlook, I definitely recommend Canopy as the only option to consider in the cannabis space right now. With uncertainty likely to continue, headwinds are likely to remain. Volatility could also remain amplified in this sector. Trade accordingly.

Stay Foolish, my friends.

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 Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands.

More on Cannabis Stocks

A cannabis plant grows.
Cannabis Stocks

TLRY Stock: Here’s What’s Coming in 2023

Tilray Inc. (TSX:TLRY) is geared up for big growth this decade and looks like one of the top cannabis stocks…

Read more »

A person holds a small glass jar of marijuana.
Cannabis Stocks

Canopy Growth Stock: Here’s What’s Coming in 2023

Canopy Growth stock has made a lot of new moves in the last few months, but where is the company…

Read more »

A cannabis plant grows.
Cannabis Stocks

Better Cannabis Buy: Canopy Growth Stock or Tilray?

Only two TSX weed stocks can deliver substantial returns in the highly anticipated growth of the global cannabis market.

Read more »

Medicinal research is conducted on cannabis.
Cannabis Stocks

Is Tilray Stock a Buy in January 2023?

Tilray stock has lost 50% of its value in the last 12 months, in line with its peers.

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Are Cannabis Stocks Still a Thing in 2023?

The whole question of whether cannabis stocks are still relevant in 2023 is an interesting one. Here's my take on…

Read more »

A cannabis plant grows.
Cannabis Stocks

Why Canopy Growth Stock Fell 72% Last Year

Canopy Growth stock is a beaten-up cannabis giant that is trading at a discount compared to historical multiples. But is…

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Is SNDL Stock a Buy in January 2023?

SNDL is among the worst-performing cannabis stocks in the last three years. But is SNDL stock a buy right now?

Read more »

a person watches a downward arrow crash through the floor
Cannabis Stocks

Why Tilray Stock Fell Almost 60% in 2022

Tilray is a Canadian cannabis stock that is down 93% from all-time highs. Let's see if TLRY stock is a…

Read more »