Canopy Growth disappointed investors last week, but there’s something important to keep in mind…
Canopy Growth Corp. (NYSE: CGC) reported its results last week, and things weren’t good.
In fact, investors were so panicked by the earnings report that the panic sent the entire cannabis sector down.
But I’d like to point out that Canopy’s results mean nothing at all for American cannabis companies. The results also don’t mean anything for companies operating outside of Canada. Imagine if the stock price of a West Coast utility company declined because there was a power outage in New York.
That’s what’s going on here.
Yesterday, I wrote that investors are expecting results right now. That view can be a little impractical, but good management teams will have to start highlighting what they are doing in the here and now.
After all, executives need to maximize shareholder value all the time.
I know a lot of folks are worried.
The State of Canopy
Canopy’s results weren’t as bad as people are saying, but they were still pretty bad. The company reported a decline in Canadian recreational sales.
But almost all of the decline occurred because of a strategic mistake the company made.
Specifically, Canopy made too much cannabis oil and softgels. Canopy hasn’t fully owned up to this mistake. We can’t know what the company was thinking for certain, but I suspect they placed too much hope and not enough research on what recreational consumers want.
Oils and softgels are very popular with medical patients, but recreational consumers apparently associate them with medical applications. They don’t want them for recreational purposes the way people want to vape or eat a gummy.
Whatever the reason, Canopy didn’t ship a lot of oil or gels during the quarter, and it established a reserve for product returns. Under accounting rules, that counts as a reduction in sales.
That didn’t help things this quarter, but even without that debacle, the revenues would still not have been very impressive. The company said that Canadian recreational sales were flat. Other companies are posting massive sales gains.
That means Canopy lost significant market share during the quarter.
That’s an opportunity for the other producers. So far, some smaller producers have been able to take advantage of the opportunity.
Canopy had other problems.
Its costs are still too high, it took a huge write-down, and it does not yet have a long-term CEO.
This doesn’t sound great on the surface, but again, the focus on big results happening right now are a little premature.
Canada’s first recreational sales happened less than a year ago, and the first retail stores in Ontario – Canada’s most populous and richest province – only started last month. People making long-term decisions based on a single quarter less than a year after legalization are making a mistake.
History Repeats Itself with Amazon
When it comes to cannabis, I’m reminded of the early days of the commercial Internet industry.
Amazon.com was one of several companies fighting for dominance. It had money and good press exposure, as well as a huge number of incredibly smart people at the helm who made online ordering easier.
The next wave of cannabis IPOs is coming… and it could deliver an influx of cash straight to your wallet. Find out more here.
Of course, the company still had its critics. In 1997, a few months before the company went public, two of the biggest journalists in America wrote an article called “Amazon.con.” People who bought Amazon when the company went public saw some painful declines.
Those investors can probably still tell you stories about those times. However, those stories will be told from the deck of their yachts.
Canopy’s long-term prospects are still bright, just as Amazon’s prospects were during those downturns.
Canopy still has a leading position in Canada. It is acquiring one of the cannabis leaders in the United States. It has a head start in several other countries around the world, and it still has a massive amount of cash to fund further expansion.
In fact, one of those new initiatives was just unveiled. It’s a $150 million hemp industrial park in New York, and this is just the tip of the iceberg for hemp farming and CBD.
If you have Canopy shares, you should worry a little less than the financial press (and let’s face it – the stock price) would have you believe.
3 Ways to Invest in Canopy Growth
Moving forward, I see three ways to invest in Canopy.
You can take the lowest-risk approach and buy Constellation Brands (NYSE: STZ).
Constellation pretty much controls Canopy. When the Canopy Growth stock price was dropping the day after earnings, the Constellation stock price actually climbed. You can learn more about why I think Constellation is a stock to buy and hold forever right here.
The next way to invest in Canopy is easy. You can just buy shares of CGC.
Outside of buying shares of Constellation Brands, that might be my favorite way to invest in Canopy right now. I’m confident the merger will go through, and your downside on Acreage is limited even if the merger is cancelled.
Executive Director, National Institute for Cannabis Investors
P.S. Traditional stocks are a great option for long-term investing – but if you’re ready for a chance to see up to 10X the return in 1/10th of the time, you should look at buying “Cannabis Lots.” This is Wall Street’s latest backdoor strategy for cannabis investing. And we’ve partnered with cannabis options expert Tom Gentile, who even says “this is the easiest way to make money I’ve ever seen in my life.” And with his scrupulously tested 90% win rate, you can enjoy gain after gain after gain. To learn more about how to get started, click here.
15 responses to “An Inside Look at the Latest Disappointment from Canopy Growth”
August 20 2019