Is Canopy Growth a Buy on its Recent Dip?

Canada has already legalized recreational cannabis and the United States might follow the same route if Biden wins the White House. However, market volatility and pandemic-driven obstacles have resulted in an uncertain future for this Canopy Growth (CGC). Does that present a buying opportunity.

Canada-based Canopy Growth Corporation (CGC), the largest cannabis company in the world by market capitalization, has a first mover advantage. The company produces, distributes, and sells a variety of cannabis and hemp-based products for medical and recreational use. Its products include dried flowers, oils and concentrates, soft gel capsules, and hemps. In May 2018, CGC was the first cannabis-producing company to be listed on NYSE.

CGC entered into a strategic relationship with a Fortune 500 beverage alcohol supplier. It also signed ground-breaking supply agreements to sell adult-use cannabis to provincial governments across Canada and internationally. Tweed, a Canopy Growth subsidiary, has introduced the concept of Compassionate Pricing to make medical cannabis affordable for patients. However, the company’s growth potential seems bleak due to pandemic-driven obstacles. This, combined with several other factors, has led to a “Neutral” rating for the stock in our proprietary ratings system.

Here is how our proprietary POWR Ratings system evaluates CGC:

Trade Grade: B

CGC is currently trading above its 50-day and 200-day moving averages of $16.37 and $16.63, respectively, indicating an uptrend. Moreover, CGC has gained 29.6% over the past six months, reflecting solid short-term bullishness.

CGC’s net revenue increased 22% year-over-year to $110 million for the fiscal 2021 first quarter that ended June 2020. The company maintained its number 1 position in the Germany flower segment and second position in Canada medical in terms of market share. The company’s supply attainment improved to 87% for the quarter.

Last month, CGC announced the launch of Martha Stewart CBD, a new line of premium quality, hemp-derived wellness supplements. Earlier this month, CGC and Acreage Holdings, Inc. announced their arrangement whereby Acreage has developed a plan to market Canopy Growth’s diverse beverage portfolio in the United States.

BioSteel Sports Nutrition Inc., a CGC subsidiary, announced an exclusive partnership with two leading beverage distribution companies, Manhattan Beer and Reyes Beer Division on October 13th.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, CGC is not well-positioned. The stock is currently trading 33.2% below its 52-week high of $25.97, which it hit on January 15th.

CGC’s net revenue grew at a CAGR of 104.7% over the past three years, but the company hasn’t been profitable yet.

Peer Grade: B

CGC is currently ranked #120 out of 240 stocks in the Medical - Pharmaceuticals industry. Other popular stocks in the medical-pharmaceuticals group are Novartis AG (NVS), Pfizer, Inc. (PFE), and Johnson & Johnson (JNJ).

NVS, PFE and JNJ declined 11.1%, 5.4% and 1.3% year-to-date, respectively, versus CGC’s 7.6% decline over this period.

Industry Rank: B

The Medical-Pharmaceuticals industry is ranked #3 out of the 123 industries. Since the world has been engulfed with the deadly virus, everyone has been waiting for good news on the vaccine front, thereby shifting the limelight onto this industry.

Overall POWR Rating: C (Neutral)

CGC is rated “Neutral” due to its questionable future outlook regarding decriminalisation of cannabis, despite having strong fundamental strength, as determined by the four components of its overall POWR Rating.

Bottom Line

While CGC has the potential to soar in the upcoming months, the stock’s future looks uncertain given the volatility of the stock market as well as election uncertainty. Though Biden is currently leading the polls, Trump has a history of beating the general survey, which doesn’t bode well for CGC. CGC has an average broker rating of 1.91. Out of 19 Wall Street analysts that rated the stock, only 5 rated it “Strong Buy”, indicating a weak upside potential.

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CGC shares were trading at $19.90 per share on Thursday afternoon, up $0.41 (+2.10%). Year-to-date, CGC has declined -5.64%, versus a 7.92% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.


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