After surging in 2017, shares of Canopy Growth Corp (NYSE:CGC) have stalled as investors have adopted a “show-me” attitude. Rather than automatically buy on account of strong future growth projections from management, investors have looked for convincing evidence of future improvement.
Those investors certainly have reason to ask for evidence given CGC stock’s high price-to-sales ratio of over 50 and the company’s previous history of not meeting profit expectations. Here are three scenarios that could cause investors to become optimistic on Canopy Growth again:
Hiring of Superstar CEO Could Juice CGC stock
Recently, former co-CEO Bruce Linton stepped down or was terminated, depending on whose story you believe. The company says the former co-CEO stepped down, while the Bruce Linton says he was fired. Either way, former co-CEO Mark Zekulin is now the sole acting CEO, and Canopy Growth’s board is looking for a new CEO.
One potential catalyst that could send the stock higher is if the board finds a superstar CEO.
The CEO is the most important person in a company. A good CEO makes the vital decisions that could decide whether Canopy Growth keeps its leading market share or loses it in the future.
There is a lot of opportunity for the number one or number two player in the cannabis space. Steifel analysts believe the global cannabis market could grow to up to $200 billion in ten years from $15 billion in 2019. If Canopy Growth finds a great CEO, Canopy stock could pay off for shareholders in the long run as management converts market share into profits for investors.
In my opinion, any brand-name CEO with a good track record, if hired, could send the CGC stock price higher. Many analysts welcome a more disciplined approach to running the company versus the more entrepreneurial approach taken by Linton.
A Good Earnings Report
Expectations for Canopy Growth stock are low due to the firing of the former co-CEO. Many analysts expect inventory writedowns rather than profits in the second half.
Currently Canopy Growth is expected to report on Aug. 14 after market close. Analysts expect an average loss of 29 per share. For its prior earnings report, Canopy Growth failed to wow investors on margins. If the company beats on margins for Q1, sequential organic revenue growth, and gives strong guidance in the future, Canopy stock could surge higher.
Further Piecemeal Legalization in U.S.
Although marijuana is legal for various medical uses in 33 states and Washington D.C., it’s not legal federally. The U.S. government doesn’t acknowledge marijuana’s medical value as much as many states do, and large-scale trials to prove marijuana’s medical value have not been undertaken. Given the political stances currently, a full and immediate legalization of weed in 2019 seems unlikely.
While full legalization seems distant, piecemeal legalization could be possible. President Donald Trump legalized hemp federally in December of 2018, albeit with strong regulation tied to it. Many states have pushed Congress in 2019 to allow the banking system to legally handle money generated from the cannabis business. Currently banks face legal risk if they process weed-related transactions due to marijuana being illegal federally.
If cannabis keeps getting these partial victories, a full federal legalization of weed could one day occur. There is reason to believe weed might one day be fully federally legal as the American public seems to be okay with legalization. According to a 2010 Pew Research Center survey, 80% of Democrats and 61% of Republicans support medical marijuana.
If there are signs of further meaningful piecemeal legalization, Canopy Growth stock could leave investors feeling ‘high’.
As of this writing, Jay Yao did not hold a position in any of the aforementioned securities.
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