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.

But before you run out and sell all your shares of Canopy, you need to read this…

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.

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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.

The third option is riskier, but you can buy shares of Acreage Holdings (CSE: ACRG, OTC: ACRGF) and get Canopy as a discount when the merger is completed.

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.

Sincerely,

Greg Miller

Executive Director, National Institute for Cannabis Investors

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Comments

15 responses to “An Inside Look at the Latest Disappointment from Canopy Growth”

  1. I keep receiving emails from different companies about a pre IPO on a company. I enjoyed reading what you wrote and will look into the other possibilities. If you have any information I would be glad to read and invest.
    Thank you.

  2. Growing pains for companies like Canopy are not unusual. What bothers me is that it did not take responsibility for the mistake and from what you said its unclear that they have adjusted strategy after it.

  3. Was wondering why you didn’t mention the CGC error in judgement for the product line in Canadian recreational market and the per share loss. As soon
    as I heard the recreational market wanted the higher THC content etc. I figured Supreme would be a good one to follow at least until they report. I believe that is next month.

  4. The perfect storm with Canopy Growth and constalation brand and anheuser busch imbev wich are in the process of cbd beverages that will be as large as monster beverages sales I’m a master brewer for ab imbev and we are in the testing stage now on this new beverages at st louis brewery

  5. I feel strongly that Canopy Growth is in a down position at this time but will make a strong comeback once they put the right CEO in place!
    I am keeping my shares and who knows, it could become another
    Phillip Morris in the near future!

  6. Hi Greg,
    Could you please explain the warrants that were extinguished by Constelllation when the Canopy earnings were announced. It seemed like a huge amount of dollars. How did that affect earnings, and how does that affect things going forward. Thanks!

  7. Haven’t heard you guys mention delta nine, seems like a great company with positive earnings, also haven’t heard anything about their nanosphere production facility

  8. I recently returned after spending nearly three weeks in Canada. The
    reason Canopy numbers are down might be related to the quality of their
    weed. I’ve talked to around 15 or so dispensary customers and all said the same thing. Don’t buy the weed from “Tweed”. They said Aurora is better
    stuff. Tweed is supposed to be one of Canopy’s top brands but word on
    the street begs to differ.

    Another thing that I saw was a lot of people(locals) are growing their own.
    It’s rather expensive if you only buy. At around $35-$50 for a few grams
    of mediocre to good cannabis, it doesn’t take long to burn through.
    Most Canadians don’t have the financial capacity to be a regular “buyer”.
    So over the long haul it’s much cheaper to grow your own. From what
    I saw, there was like a competition amongst friends on who could grow
    the best stuff, but that they also helped each other out and compared notes. Some of the grow ops were quite impressive.

  9. Oh another thing, of all the dispensaries I visited, none had any form
    of customer feedback….. what a shame !

  10. The hemp industry is a new ground from point of legislation and management. A lot of patience is required. you can get into this area by small investment instead of standing on the side, if you like.. Look at great stocks around you. They took a number of years to grow. The same rule applies here.

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