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Canopy Growth Stock: Is the Worst Really Over?

Tom Taulli

After hitting a 52-week low earlier in the week, Canopy Growth (NYSE:CGC) stock has gone into the rally mode along with other top operators in the category like Cronos (NASDAQ:CRON), Tilray (NASDAQ:TLRY) and Aurora Cannabis (NYSE:ACB). Note that yesterday CGC stock jumped by 15% and today the shares are up about 9% in early trading.

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There are two main catalysts for this. First of all, the House Judiciary Committee is drafting a bill – called the Marijuana Opportunity Reinvestment and Expungement Act – for the elimination of the federal ban on cannabis. True, this may ultimately go nowhere, but it is still an indication that there is growing support for legalization.

Next, Bank of America analyst Christopher Carey came out with a positive report on CGC stock, issuing a “buy” recommendation and a $19 price target. He said that Wall Street expectations are much more reasonable now.

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It’s true that all this should still be taken with a grain of salt. Let’s face it, CGC has legitimate issues. During the latest quarter, the company reported a net loss of CA$374.6 million or CA$1.08 per share. The company also had to take a $15.9 million write off for inventory.

One of the problems is that black market activities remain a major challenge in Canada. For the most part, there are many small operators that are finding opportunities to soak up demand. This is especially the case since the regulatory process in Canada has been moving at a glacial pace. For example, there are only 25 retail outlets in Ontario.

The cannabis sector is also facing other issues, such as the vaping crisis. Granted, the cannabis industry could ultimately have little or no responsibility. Yet there still remains a cloud over the industry.

Silver Linings for CGC Stock

When it comes to Canopy Growth stock, there remain clear-cut advantages as well. And even some of the negatives will likely turn to positives, say with the retail outlets in Canada. Once the regulatory process gets streamlined, it probably will not be too long for there to be a spurt in growth.

In the meantime, CGC has the resources to continue to invest in its operations and pull off more acquisitions (no doubt, the valuations are much more compelling now). The company has $2.7 billion in the bank.

A big slug of this came from its biggest investor, Constellation Brands (NYSE:STZ). The company has been taking a more proactive role in CGC, including the removal of the CEO. STZ is now working hard to bring in a top-notch leader. This is expected by year end.

STZ also will be instrumental in key areas like distribution, marketing, advertising and the leveraging of existing brands (like Corona Extra, Corona Light, Modelo Especial, Modelo Negra and Pacifico). There are already signs that the assistance will be key with the gearing up for Cannabis 2.0. This for the legalization of the edibles market in Canada, which will begin next month. This is likely to be a strong growth catalyst for CGC.

Bottom Line on Canopy Growth Stock

Even with the problems in the Canadian market, CGC is still growing the top line at a fast pace. And again, there is the substantial cash balance and there should be much value from the partnership with STZ.

However, given the recent spike in CGC stock, it may be worth waiting a little bit before making a purchase (after all, there has likely been considerable short-covering). But when things settle a bit, CGC stock does look like a good long-term play on the cannabis opportunity.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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