Canadian pot producer Canopy Growth (CGC) broke out of a consolidation in early November, after President-elect Biden won the U.S. presidential election and raised investors’ hopes of nationwide pot legalization. But it continues to make aggressive cost cuts. Does that make Canopy Growth stock a buy right now?
The rally for the stock continued later in the month, as Biden’s transition formally began, even as President Trump vowed to continue challenging the results.
Biden himself has expressed support for federal decriminalization of marijuana. Vice President-elect Kamala Harris has sponsored the MORE Act, a proposed measure that would pull cannabis from the list of controlled substances. The MORE Act passed the House in December. But it has little hope in the Senate.
Full legalization would allow big Canadian pot producers to storm southward into what would be the world’s biggest legal market after struggles at home. And it would enable Canopy to fully activate the cannabis infrastructure it has been assembling in the U.S. for nearly two years.
The GOP could still hold onto the Senate, where two runoff elections in January will determine the precise makeup in the chamber. Republican control would likely narrow the road to reform. And some analysts have said investors shouldn’t get their hopes up for a Canadian rush into the states.
‘When, Not If’
Canopy Growth CEO David Klein, during the company’s third-quarter earnings call in November, said it was only a matter of time until it could fully enter the U.S.
“We’ve already developed a U.S. ecosystem that positions us well as a hemp and cannabis powerhouse — when, not if, U.S. permissibility happens,” he said on Canopy’s earnings call Nov. 9.
Canopy, in 2018, landed a $4 billion investment from Corona beer parent Constellation Brands (STZ). It launched a website to sell CBD products in the U.S. — including those from Martha Stewart and Biosteel, a sports nutrition company it majority owns. It also owns vaporizer maker Storz & Bickel.
Canopy also has an agreement in place to buy U.S. peer Acreage Holdings (ACRGF) once pot is federally legalized. But in June, it revised that deal in a way that appeared to reduce its financial commitments. Canopy has also invested in TerrAscend, which has operations in Canada, along with some in the U.S.
Klein said Canopy planned to bring more products into the U.S. through that infrastructure, as regulations loosen up.
However, the company in December said it would close several production facilities in Canada, including its outdoor growing operations. The moves intended to “streamline its operations and further improve margins.”
Canopy Growth Fundamental Analysis: Still No Profits
Through last year and much of this year, Canopy Growth stock tumbled from the highs reached before Canada’s recreational legalization in 2018. But the post-election rally this year has given it a market cap of around $9.9 billion, making it the No. 1 marijuana stock by value.
However, the EPS Rating of Canopy Growth stock, a measure of profit growth on a scale of 1 to 99, is a mere 19. Earnings growth is a hallmark of top stocks. Like other big marijuana stocks, Canopy has lost money after investing in expansion.
Those losses, and disappointing sales growth, eventually led to the ouster of Canopy’s longtime co-CEO, Bruce Linton, last year, after Constellation Brands expressed disappointment in the results.
In an effort to stem those losses, Klein, the former CFO of Constellation Brands, has laid off hundreds of employees and closed greenhouses. In April, Canopy said it would exit operations in South Africa and Lesotho, close an indoor facility in Saskatchewan, stop cultivating in Colombia, and stop hemp farming in Springfield, N.Y.
Canopy cited a number of reasons for the decisions: aligning production with demand, too much hemp in the U.S. last year, and moving to an “asset light” model in Colombia. But they all reflect Klein’s efforts to cut costs.
“When I arrived at Canopy Growth in January, I committed to conducting a strategic review in order to lower our cost structure and reduce our cash burn,” Klein said in a statement.
Canopy Growth Results
Klein, when Canopy reported fiscal second-quarter results in November, said the company would undergo “further rightsizing of our labor.” During the quarter, it said it cut operations staff by around 14%.
Still, Canopy’s results during the quarter beat expectations. And it said it was “firmly on a path” to reach positive adjusted EBITDA at some point next fiscal year. EBITDA stands for earnings before interest, taxes, depreciation and amortization.
Management said its market share had expanded, helped by openings of more stores, particularly in the large province of Ontario. And it said it identified “cost savings opportunities in the range of $150-$200 million” over the next two years.
The company said it could save money by removing lower-demand products and strains. And it also said it would try to make production facilities more efficient by tailoring each toward more specific purposes.
But analysts have suggested the company still has work to do. Stifel analyst Andrew Carter noted that the company had burned 190 million in Canadian dollars in cash during the quarter.
“Even with the stronger headlines and Canopy‘s advantages, we believe Canopy has yet to make that case with the increasing expense of the Canadian category likely a near-term impediment to garnering enthusiasm for profitable growth,” he said in a research note.
Canopy Growth Stock Technical Analysis
IBD advises investors to buy stocks only after they set up in proper bases and rise above certain resistance levels, called buy points. That research shows that when a stock breaks past such a buy point after shaking out more skeptical investors, it could mean a longer run higher is ahead.
Canopy on Nov. 6 broke past a consolidation with a 22.29 buy point. The stock on Nov. 24 was still well above the 5% buy zone — an area that IBD considers ideal buying territory for stocks.
CGC stock has a Composite Rating of 83 out of a best-possible 99, according to MarketSmith. Investor’s Business Daily research shows the biggest stock winners typically have Composite Ratings in the 90s.
Canopy’s relative strength line, which compares CGC’s stock performance to the S&P 500, staged a rebound at the beginning of October. But that rebound tapered off at the end of November.
Canopy Growth stock is above its 50-day and 200-day lines.
CGC Stock Vs. Other Marijuana Stocks
The most highly rated marijuana play remains Innovative Industrial Properties (IIPR), a real estate investment trust that backs greenhouse buildings and other spaces in the medical marijuana industry. It has a Composite Rating of 94 and an EPS Rating of 74.
Canopy Growth Stock Is Not A Buy
Even as more strait-laced executives try to tighten up Canopy’s operations, the company is still losing money. It operates in an industry fraught with regulatory and legal hurdles. The economy remains badly shaken by the coronavirus pandemic.
By IBD’s typical yardsticks, Canopy Growth stock is not a buy. The stock is extended out of buy range. Profits are also still elusive. However, investors who accept the risks and are nonetheless eager to get into marijuana stocks could buy Canopy, based purely on its chart pattern, once it is in a buy zone.
Ideally, though, IBD’s research shows, investors would be better off looking for stocks with stronger fundamentals and that are closer to their highs.
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