Cannabis stocks performed terribly in 2019, and Canopy Growth (NYSE:CGC) was no exception. Despite the backing — to the tune of $4 billion — of Constellation Brands (NYSE:STZ), and over a full year of legal cannabis sales in Canada, CGC has yet to turn a profit. With investors souring on the cannabis industry in general, Canopy Growth stock lost 23% of its value in 2019. That number is actually misleading because CGC went into 2019 just as it was beginning to recover from a slump. It actually closed the year down a whopping 52% from its high at the end of April. So it is big news that CGC has strung together multiple days of significant growth. After a 4.4% pop on Wednesday, that’s 21% in just three days.
What is going on with Canopy Growth? And more importantly for investors, can it sustain this rally to the point of a full-blown recovery?
Why the Sudden Optimism Around Cannabis Stocks?
This week has been an anomaly if you’ve been following cannabis stocks. For much of 2019, the story was rather grim. However, this week has seen many of them pop. CGC is up 21% since Monday. Hexo (NYSE:HEXO) is up 38%. Aurora Cannabis (NYSE:ACB) is up 25%. Cronos (NASDAQ:CRON) is up 23%.
Even lowly CannTrust (NYSE:CTST) has seen an 11% gain.
There seem to be two factors that have lit a fire under these stocks this week. The first is the news that the first edibles under Canada’s “Cannabis 2.0” rollout hit stores. The second is the introduction of a bipartisan bill in the U.S. that would bypass Food and Drug Administration restrictions and legalize hemp-derived CBD nationally for use in foods and supplements in the American market.
What If Cannabis 2.0 Also Stumbles?
Having Congress take action to eliminate the confusion over CBD sales in the U.S. will undoubtedly help cannabis producers. Many of them already sell CBD products in that market (the FDA hasn’t been enforcing its ban), but legalization would likely provide at least a modest boost to sales.
The bigger issue for most cannabis stocks is the Cannabis 2.0 rollout in Canada. What happens if it also stumbles the way the initial legal recreational marijuana launch did? After all, that disaster was the reason so many cannabis stocks went through the roof in 2018 (in anticipation) and then tanked as reality hit.
Unfortunately Cannabis 2.0 got off to a rocky start, with a lengthy waiting period between legalization of edibles and when companies could actually sell them. Even with edibles and cannabis-infused drinks now available (nearly a month after legalization), there are once again shortages in stores. Ontario — by far the country’s largest market — remains critically underserved, with a fraction of the expected retail locations open. Canada’s second-largest province played spoiler by announcing a ban on the sale of most cannabis edibles. Despite legalization at the federal level, Quebec is concerned that sweetened cannabis products would appeal to minors. Consumers are balking at the price of what edibles are available.
Adding to the industry woes, legal recreational marijuana sales across Canada were dropping through the fall.
The industry pinned a lot of hopes on Cannabis 2.0 being the point where the legal marijuana market in Canada found its legs. Instead, it’s showing all the signs of being a repeat of last year.
Bottom Line: Canopy Growth Stock Remains a Risky Bet
At under $25, CGC can be a tempting investment. Twice in the past year and a half, the stock has been trading in the $50 range. The company has a new CEO in place, the backing of a multinational beverage conglomerate, and Canada’s Cannabis 2.0 market has launched. After being beaten down for virtually eight straight months, CGC just strung together three straight days of gains for an impressive 21% boost.
Unfortunately, many of the challenges that caused Canopy Growth and other cannabis stocks to perform so poorly last year remain, especially in the Canadian market. There has been some optimism to start 2020 because of the edibles launch and the promise that Ontario will open more recreational cannabis stores, but that may not be enough. The investment analysts polled by CNN Business rate Canopy Growth stock as a “hold,” and their median 12-month price target of just $19.77 represents 20.6% downside. Of the 21 analysts, the most optimistic has a $25.28 price target.
Maybe they’re all wrong. Maybe 2020 will be the year the legal recreational marijuana market takes off in Canada, powering cannabis stocks to a recovery. But I wouldn’t bet on it.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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