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CGC Stock Will Be Volatile Heading Into Earnings

Tezcan Gecgil

Broader markets received somewhat of a shock to the system in early May when President Trump announced that the U.S.-China trade dispute was far from being resolved any time soon. And many sectors have been choppy in the fast few weeks. One stock that has been in a downtrend since late April is Canada-based Canopy Growth (NYSE:CGC), a front-runner of the marijuana industry (MI).

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As pot stocks are giving back some of their big gains from the last 12 months, it’s quite hard to predict which stocks in the industry will perform well in this volatile market. CGC stock is expected to release Q4 fiscal 2019 earnings on June 20. Last quarter saw CGC’s earnings come in significantly below expectations. And the stock is seeing weakness after a strong start to the year. Now that the reporting season is fast approaching, let’s look at what may be next for the Canopy Growth stock price.

Long-Term Tailwinds for Canopy Growth Stock

As a diversified cannabis and hemp company, Canopy Growth is Canada’s largest pot stock by revenue and market cap. It started trading on the Toronto Stock Exchange (TSE) in August 2016 and got a dual listing at the New York Stock Exchange in May 2018.

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The global legal marijuana market size is expected to be over $65 billion by the end of 2025. Yet at present, the legalized MI is still at its infancy in Canada and almost non-existent globally. In December 2018, marijuana producers and investors cheered when the U.S. legalized hemp and hemp-derived ingredient cannabidiol (CBD), the non-psychoactive ingredient of marijuana.

CBD is especially popular among consumers seeking relief from physical pain as many believe that CBD provides most of the health benefits of medical marijuana. Because hemp is now an ordinary agricultural commodity, Canopy Growth has obtained a license to process and produce hemp products in New York State.

Canopy Growth is hoping become one of the first marijuana producers to have its products in the U.S. market through its partnership with the NY state-headquartered alcoholic beverages giant Constellation Brands (NYSE:STZ) which has already invested $4 billion into CGC stock.

The two companies are currently developing cannabis-infused beverages for Canada, where experts believe they will be legal by 2020. This legalization of edibles is likely to act as a powerful catalyst for the major cannabis companies.

Although it is too soon to predict how the legal hemp production in the U.S. will affect CGC’s bottom line, Canadian leaders like Canopy Growth are likely to become the first ones to be positively affected by major North American or global developments that may boost the sales and the use of recreational or medicinal marijuana. This, in turn, would also boost the stock price of CGC.

However, it will probably be several quarters before the U.S.-related investments would pay off and turn into profits.

Short-Term Headwinds for CGC

Many investors are worried that the initial hype surrounding the industry may possibly be decreasing. Therefore, CGC’s upcoming earnings report will be important not just for the company but also for the industry, as not everyone is convinced that Canadian recreational weed sales will remain strong.

And if CGC’s numbers do not come out as high as expected, then there would not be much momentum for Canopy Growth stock or the cash-intensive industry as a whole. Investors are beginning to get concerned about how increased spending is reducing earnings and cash flow numbers. So far, cannabis stocks have largely been driven by hype and publicity, such as the investment by Constellation Brands in CGC.

Indeed, many analysts are concerned that the valuations in this new consumer market are extremely high, that most of the cannabis stocks are going through cash fast and that many are not likely to achieve profitability in the near future.

In January, CEO Bruce Linton said that Canopy Growth did not plan to acquire any more Canadian cannabis assets. In other words, the company is possibly regarding the growth levels in Canada as not enough for the ambitious expansion plans.

If further growth does not come from the rest of the world and especially the U.S., Wall Street is likely to start devaluing most of these pot companies substantially. Thus, if there were legal issues, especially in the U.S., regarding the potential of legalization of marijuana at the federal level, the industry would take a hit.

One important benefit of the investment by STZ, which now has a 37% interest in CGC, has been that Canopy Growth has the financial muscle to pursue acquisitions and invest in R&D to grow its production space. However, not all potential deals are likely to benefit CGC shareholders immediately.

For example, the group has an agreement in place to acquire U.S.-based Acreage Holdings (OTCMKTS:ACRGF) for $3.4 billion. However, this acquisition can only happen if cannabis is legalized federally in the U.S. Would investors give Canopy Growth a blank check for an open-dated deal?

Takeaway for Canopy Growth Stock

Investors may have to wait until Canopy Growth’s earnings report later in the month to have a better view on the developments in the industry as they affect CGC stock. Analysts will pay special attention to the sales figures and the level of operational loss.

For Canopy Growth stock, it may be a long and choppy journey back to the all-time high of $59.25 as rich valuations in this commodity-based consumer market may take a hit in the coming months.

There might also be profit taking and investor uncertainty about the general markets as well as the weed industry. As we enter the second half of the year, could investors become more risk averse and shy away from these high-growth yet potentially risky stocks for their portfolios?

In addition, investors who look at the CGC stock chart may be raising their eyebrows as currently the stock is down from a 2019-high of $52.74 reached on Apr. 29 to low-$40’s.

Those who bought at the high might not be too happy, but investors who had the courage to step in at the end of 2018 when CGC stock saw $25.26 are still in pretty good shape. If you are an investor with paper profits, should you consider locking in some of those gains now?

At present, the short-term technical charts, especially the trend lines and support and resistance levels, are telling investors to exercise caution.

Of course, Canopy Growth stock may initially rally around the quarterly report, and a potential investor could miss out on some profits for not having bought into the CGC shares early on. Or there might be a few other newsworthy moments that may get investors to set their sights back on Canopy Growth stock.  However, I do not think such potential up moves will be long-lived.

If you are considering investing in Canopy Growth, you may want to start building a position between the $27.5-$32.5 levels, and expect to hold the stock for several years. In the meantime, expect a lot of volatility in CGC share price.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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