I’ve been covering cannabis stocks for years. I’ve never bought a single share of any cannabis stock in my own personal trading account. But that changed this week when Canopy Growth (NYSE:CGC) stock finally dropped too low for me to resist.
The outlook for cannabis stocks is not nearly as bright as it was two years ago. But I decided to start buying CGC stock this week at $11.76. As I have said before, Canopy’s management is positioning the company to thrive in the long-term. The company also has the best balance sheet in the cannabis group and could even be a buyout candidate.
However, in addition to the cheap share price, another piece of news this week finally got me to dip my toes in. It turns out Canadians are turning to marijuana to help deal with the stress of the COVID-19 outbreak.
Canada Turns to Self-Medication
For many Americans, the COVID-19 outbreak and the economic shutdown have created an extremely uncertain and stressful environment. But people like to use cannabis to help cope with the chaos.
Most businesses are getting devastated by the economic shutdown, but not cannabis. Bank of America analyst Christopher Carey says most Canadian cannabis retail stores remain open. As of March 22, Carey estimates 97% of Canadian retail locations were still open. Canopy closed its 23 retail locations in Newfoundland, Saskatchewan and Manitoba. However, its wholesale and online businesses are still running strong.
The outbreak hasn’t hurt sales. Carey says cannabis sales in Canada are climbing.
“It’s clear to us that cannabis purchases have meaningfully accelerated amidst more consumers staying at home longer,” Carey says.
A new BDS poll of North American cannabis retailers found that 94% say traffic has increased during the COVID-19 outbreak, while 6% say they see no difference.
In other words, coronavirus-related social distancing has been a bullish catalyst for cannabis sales. Yet CGC stock is down 23% in the past month.
CGC Stock Is the Lowest-Risk Cannabis Play
While that disconnect between sales and share price may seem irrational, it’s likely more of a reflection of perceived risk. Yes, Canopy’s business may have gotten a boost from the outbreak. But the North American macroeconomic backdrop has gotten a lot shakier in the past month. And investors know cannabis stocks in general have struggled with profitability and been heavily reliant on debt to grow and expand their businesses.
However, Canopy’s balance sheet is one of its biggest selling points. As of the end of 2019, Canopy had 1.6 billion CAD in cash and cash equivalents. While several of its cannabis peers are piling on debt to keep the lights on, Canopy is actually paying down its debt. From March 2019 to the end of the year, Canopy’s long-term debt dropped from 842 million CAD to 536 million CAD. At the same time, the company is generating tremendous growth, including a 49% jump in sales last quarter.
Carey says Canopy’s management team is making all the right moves to position Canopy to be a long-term market leader.
“While we think there remains risks near-term, namely execution on the roll-out of derivative product forms in Canada, we see this appropriately reflected in Street estimates and valuation on shares,” Carey says.
Potential Wildcards
New Canopy CEO and former Constellation Brands (NYSE:STZ) CFO David Klein has been trimming the fat on its business and shoring up its balance sheet. Constellation Brands holds a 38% ownership stake in Canopy. Constellation management worked closely with Klein for years. I’ve said before that Constellation may have put Klein in charge to get Canopy’s finances in order before it comes to its shareholders with a potential buyout deal.
In 2018, Constellation paid $4 billion for its 38% Canopy stake. Today, Canopy’s entire market capitalization is just $5.19 billion. At the very least, Constellation has the resources and global presence to provide financial backing and expertise as Canopy grows its business.
The other potential wildcard for CGC stock is U.S. legalization. If marijuana is eventually legalized in the U.S. on the federal level, Canadian cannabis companies will be scrambling to get a piece of the massive market. However, Canopy has already secured a conditional buyout of Acreage Holdings (OTCMKTS:ACRGF). As of earlier this year, Acreage operated in 20 different U.S. states, more than any other U.S. multi-state operator.
Canopy is the leading Canadian cannabis producer by market share. It has the best balance sheet in the group and a major financial backer/potential buyer. The icing on the cake is…
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