U.S. Markets close in 44 mins

Buyers Should Beware Canopy Growth Stock

Dana Blankenhorn

As Canopy Growth (NYSE:CGC) prepares to announce its fiscal first-quarter earnings Aug. 14, analysts are getting nervous. Founder Bruce Linton was told to leave after the last quarter’s disappointment. Constellation Brands (NYSE:STZ), which bought 38% of the company last year, has lost patience with CGC stock’s losses.

CGC Stock Is a Drag on the Rest of the Cannabis Sector

Source: Shutterstock

But more losses are still expected. The official estimate is 28 Canadian cents-per-share, but the “whisper number” analysts are telling their best customers is as high as 37 cents. Analysts expect revenue of $86 million (in Canadian dollars), down from last quarter’s $94 million.

Since those losses came out, CGC stock is down 25%, cutting the market cap to $11.26 billion (this time, in U.S. dollars). Constellation stock is down 4% and, while it’s still up around 20% for the year, patience is wearing thin.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Too Much Pot?

The problem for Canopy, as for other big producers, is that they invested while heavily anticipating legalization. However, legalization efforts are moving slower than some firms bargained for. This can be great news for pot smokers, but very bad news for suppliers, who are now being told to start making money, or else.

Smaller players are being weeded out. The job of new Canopy CEO Mark Zekulin, a longtime insider, may be hanging by a thread.

Linton and Zekulin invested heavily in production capacity and branding, expecting 500,000 kilos of production this year. This investment may not pay off — the problem is that while Canada legalized marijuana almost a year ago, provinces can still regulate it. Quebec has been resistant, while legislators in western Canada opposed the move.

For CGC stock, the result is that earnings expectations have been falling. Analysts were expecting Canopy to make money in fiscal 2021. Now they’re expecting more losses.

Where are the Bulls?

There remain Canopy bulls. Nicolas Chahine recently called Canopy a buy at current levels. He still considers it speculative but notes that current bottlenecks should be removed over time. Illinois passed a bill legalizing the sale and use of recreational marijuana in June, and regulators expect sales to launch in January. This bill makes Illinois the eleventh U.S. state to legalize recreational use.

Smokers aren’t the only market. CBD oil is increasingly popular. A friend of mine swears by it for her chronic knee pain. Riding the highs of CBD oil, Canopy is investing in researching its use as a medicine and in producing a line of industrial hemp. Outside of North America, Canopy has focused its attention on Spectrum Therapeutics, a brand focusing on dosing CBD oil as a softgel pill.

Within Canada, a lot of Canopy’s investment went into the Ottawa suburb of Smiths Falls, where there is a palpable nervousness about the Aug. 14 numbers, and how Constellation might react to them.

The Bottom Line on CGC Stock

If Canopy delivers the revenue growth bulls are expecting, the stock will rise and the pressure will be off. The pending acquisition of U.S.-based grower Acreage Holdings (OTCMKTS:ACRGF) could complicate the outlook.

The Acreage deal gives Constellation Holdings more time to exercise warrants giving it majority control. Canopy confirmed Aug. 8 that they were planning on acquiring the right to buy ACRGF for $3.4 billion — CGC can’t fully acquire Acreage until marijuana production and sale are federally legalized in the U.S. Despite the pending acquisition, investors are still trading ACRGF stock, which is down 40% over the last three months.

Legal marijuana could well become a gold mine for today’s speculators, but the hype train has left the station. Some people are now comparing pot to 3D printing, rare earth metals and solar panels — three big prospective industries that failed to live up to their promised potential.

If you are betting on legal pot in 2019, you should tread carefully and be prepared for some short-term losses.

Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

More From InvestorPlace

The post Buyers Should Beware Canopy Growth Stock appeared first on InvestorPlace.