Should You Buy Canopy Growth Stock Prior to Earnings in June?

Since becoming listed at the New York Stock Exchange in May 2018, Canada-based Canopy Growth’s (NYSE:CGC) stock has rewarded investors richly. So far in 2019, CGC stock is up almost 65%.

Should You Buy Canopy Growth Stock Prior to Earnings in June?

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CGC is expected to release earnings on June 20. Now that the earnings season is fast approaching, let’s look at what may be next for the CGC stock price.

Here are three pros to Canopy Growth stock and three cons.

Three Pros for CGC Stock

Industry Leadership in Canada: As a diversified cannabis and hemp company, Canopy Growth is one of the industry leaders in Canada. It started trading on the Toronto Stock Exchange (TSE) in August 2016.

During CGC’s last earnings call in February, investors noted that sales from the black market in Canada are now shifting to legal online sales, i.e., to the retail sites of Canopy Growth and other major companies in the industry.

The company also has operations in over a dozen countries in five continents. CGC’s investments in these overseas markets are likely to give it a head start globally, too. However, the details about the worldwide operations are somewhat sketchy as they do not yet contribute to revenues.

In other words, the legalized Marijuana Industry (MI) is still at its infancy in Canada and almost non-existent globally. 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 use of recreational or medicinal marijuana. This, in turn, would also boost the stock price of CGC.

Increasing U.S. Liaisons: In August 2018, when the NY state-headquartered alcoholic beverages giant Constellation Brands (NYSE:STZ) announced a $4 billion investment into CGC, Wall Street took notice. STZ now holds a 38% stake in the company. At the time, this investment sent the entire cannabis sector on a month-long rally.

In December 2018, the U.S. legalized hemp and hemp-derived ingredient cannabidiol (CBD), especially popular among consumers seeking relief from physical pain. Because hemp is now an ordinary agricultural commodity, Canopy Growth has now obtained a license to process and produce hemp products in New York State.

Although it is too soon to predict how the legal hemp production in the U.S. will affect CGC’s bottom line, analysts believe that the partnership between Canopy Growth and Constellation Brands is the area to watch. The two are currently developing cannabis-infused beverages for Canada, where experts believe they will be legal by 2020.

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

Recent Acquisitions: One other important benefit of the investment by STZ has been that Canopy Growth now has a massive cash horde, which allows it to pursue acquisitions and invest in R&D to grow its production space.

On May 22, CGC announced the acquisition of This Works, a U.K.-based well-being company, for $73.8 million in cash. This Works manufactures and sells natural skincare and sleep solutions to customers in 35 countries.

As CBD oils rises in popularity, this acquisition enables Canopy Growth to grow its brand among CBD-infused wellness products and to reach a broader audience internationally. Yet, this is a small transaction that may not have too much positive bottom line implications for shareholders in the near term.

The company’s recent agreement for acquiring the rights to the future purchase of U.S.-based Acreage Holdings (OTCMKTS:ACRGF) is another example of how Canopy Growth is trying to solidify its position in MI.

At the federal level, marijuana is still illegal in the United States and remains a Schedule I drug. This $3.4 billion cash and stock deal gives Canopy Growth the means to enter the U.S. market should federal legalization occur.

Although CGC stock was initially up following the announcement, many analysts do not regard it as a done deal until the U.S. legalizes marijuana. And Wall Street does not know if or when this will happen. It is possible that activist investors may block the deal.

In other words, the various acquisitions the company follows are rather long-term plays for Canopy Growth stock that may mean more for shareholders in years to come, as opposed to soon.

Three Cons for Canopy Growth Stock

Mixed Results From Its Main Competitor: On May 15, Aurora Cannabis (NYSE:ACB), one of the main competitors of Canopy Growth, released mixed earnings result, which initially sent down ACB and CGC shares as well as other weed stocks.

Despite 367% year-over-year (YoY) growth in revenue, ACB missed analyst estimates by a wide margin. Whenever Wall Street doubts whether any of the weed companies can deliver the expected growth numbers, the overall industry gets penalized.

Therefore, many investors may decide to wait to hit the”buy” button on CGC stock, until they have seen the next earnings result in June. At present, the bulk of CGC’s revenue comes from the recreational side of the industry (as opposed to the medicinal side).

So Wall Street will be keen to analyze whether Canopy Growth will grow the recreational sales it has achieved last quarter. In its last report, the company had logged a 282% increase in quarterly revenue, mostly thanks to the growth in the recreational marijuana market in Canada.

Could the Hype Surrounding the Industry Be Decreasing?: 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. 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 these companies, including Canopy Growth, 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.

For example, if the New York and Toronto Stock Exchanges where CGC stock is dual-listed does not allow the acquisition of Acreage Holdings by Canopy Growth, then the CGC stock price would be adversely affected.

Shorter-Term Technical Analysis: The month of May has not been a good one for Canopy Growth stock. On April 30, it saw an intra-day high of $52.74. Since then, the stock price has been falling. On May 20, it hit a monthly low of $43.02.

It is also important to note that on Feb. 4, Canopy Growth stock saw an intra-day high of $51.81. In other words, between early February and the end of April, the stock has been trading in a wide range, approximately between $52 and $42. And Canopy Growth stock has encountered substantial resistance near the $50’s level.

CGC stock’s short-term technical chart looks weak, pointing to the possibility for more downside around the corner. Expect nearer-term trading to be choppy at best, possibly until the earnings announcement date in late June.

At this point, the unknown outcome of the Acreage Holdings deal, as well as the growth (or lack) of the recreational market in Canada, are likely to keep CGC stock from rallying over $50. Furthermore, if there is any broader market weakness in Canadian stocks, say due to market worries over U.S.-China trade wars, CGC stock may also be adversely affected.

After the earnings results, if you still believe in the bull case for Canopy Growth stock, you might consider waiting for a better time to get long, such as around the low $40’s or even mid-$30’s levels.

The Bottom Line for CGC Stock

I am of the camp that the 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. In addition, the short-term technical charts, especially the trend lines and support and resistance levels, are telling investors to exercise caution.

Of course, the 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. However, I do not think such a potential up move will be long-lived.

If you are considering investing in Canopy Growth, a front-runner of the marijuana industry, you may want to start building a position between the $30-$35 levels, and expect to hold the stock for several years.

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

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