Of all the cannabis stocks trading on the TSX, Canopy Growth (TSX:WEED)(NYSE:CGC) is among the best positioned this week. But reassuring earnings and a presumed Joe Biden win still don’t quite add up to a consensus buy signal.
Expect more pot stock volatility to come
Cannabis investors aren’t being given an easy ride this week. In general, Canadian cannabis stocks have been chewed up by the pandemic. They were already on dodgy ground. A piecemeal retail landscape and the staggered legalization of cannabis asset types left cannabis producers with a weakened immune system. And then along came the public health crisis.
Monday saw cannabis stocks bounce as a change in U.S. leadership got investors stoked for legalization south of the border. But that upside proved to be limited. Post-earnings, some of legal weed’s biggest names slumped the very next day. Canopy fell 4%, while Aurora lost 21%. Other names failed to hold onto their momentum, too, with Tilray bleeding 15%.
Volatility in cannabis stocks is nothing new. Indeed, a long-term strategy has emerged from the ashes of the heady pre-legalization days. Instead of running pot stocks as far as they’ll go, the new growth thesis looks beyond near-term capital gains. Instead, long-range investing seeks to identify market leaders — especially those with international appeal.
Up until now, the focus for fast-growing international cannabis markets has been the European Union. But Canadian cannabis investors have been keeping one foot in the U.S. markets, too. And now, with the hope for American legalization fueled by a Democrat takeover, cannabis stocks have a second potential front for wholesale growth.
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An intriguing but frustrating cannabis market
Names like Canopy are in enviable positions to penetrate a federally legalized U.S. marijuana market. But two factors got in Canopy’s way this week. For one thing, U.S. politics, despite a Democrat win, is still starkly divided. This could make it all the harder to legalize marijuana at the federal level. For another thing, recent earnings — though encouraging — could have been better.
Yes, quarterly revenue handily beat records, pushing Canopy’s share price to a year-long high. Meanwhile, operating expenses had been slashed by almost 20%. These two facets make for a leaner outfit and add to a buy thesis. But tighter capex does not necessarily equal profitability. Overall, a projected net loss of $1.27 a share for the year doesn’t sit well with a stock still trading at 2.3 times its book price.
Post-earnings, Canopy is still a top pot stock at the top of its game. But that game is a complex one during a public health crisis. Cannabis investors will need to wait and see what the future holds, therefore. With U.S. federal legalization now a step closer, profitability nevertheless remains elusive amid a patchwork retail landscape.
2020 should have been Canadian legal weed’s big year. Instead, shareholders will have to wait until the pandemic is at an end before seeing the wood for the trees. Indeed, it could be some time before both the true value — and the true potential — of this green-behind-the-ears industry becomes apparent.
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 Victoria Hetherington has no position in any of the stocks mentioned.