Should you be buying Canopy Growth in 2020?

The industry-leader lost over 60% of its value in 2019 but has seen a solid uptick in the first few weeks of 2020. Is Canopy Growth a buy?

We have written before just how bad 2019 was for the cannabis industry. Sky-high valuations, a capital crunch and the vaping crisis rocked the US, whilst fraudulent Licensed Producers (LPs), limited access to retail stores and the wrong product mix, significantly stifled Canada's growth.

Canopy Growth has always been seen as the market leader and a barometer for the industry. This played out in 2019 as the stock lost over 60% of its value (mirroring the industry's Armageddon-like decline), and in the process, many cannabis investors lost millions.

In late 2019, Constellation Brands took a second stake in the company, when they upped their stake in the company to 45% for a cool $5 billion, and with it, also took 4 of the 7 board seats. Importantly – this gave them control of the company. Many investors missed this at the time, but this power and control were flexed when on July 3 last year, Constellation rocked the cannabis world by firing Canopy Growth's rockstar CEO, Bruce Linton. 

David Klein Canopy Growth CEO
Canopy Growth CEO – David Klein

The cannabis world waited patiently for a couple of months before Constellation announced Canopy's new CEO, David Klein. In doing so, they made a big statement. Klein, who has served in several management positions in the past (many as CFO), took the reins of the world's largest cannabis company, and the message was clear – the days of massive cash burn were over. The time had come for Canopy to align its strategy and look to move towards profitability.

In the last quarter (ending in September 2019) the company – once again – reported a massive net loss of $375 million. This was on the back of a mind-blowing $1.28 billion loss in the June quarter (although to be fair, much of this loss was attributable to warrant adjustments with Constellation Brands).

Even with these losses, the company still ended the last quarter with $2.75 billion in the bank. This is the largest war chest that any company in the cannabis industry has, and is one of the primary reasons, we feel secure that Canopy will eventually rise to the top again. 

At one stage, WEED stock was trading as high as $70 per share, but with the pressure on the cannabis industry in 2019, traded as low as $20 per share in mid-November. However, the start to 2020 has been good to WEED as the stock has drifted upwards, currently trading at $32.57 per share (at the time of writing).

We feel this upward movement on the stock price could continue, and that 2020 could be a great year for the company, for a number of reasons.

Legalisation 2.0

In October last year, Canada finally legalised the most in-demand of all form factors – edibles and extracts. Having launched initially with flower and low-potency oils only, the Canadian recreational market got off to a horrific start. But the new product mix is what people wanted from the start, and early indications have shown these products to be flying off the shelves. This is not surprising, as data from mature US States clearly shows the demand for vapes and edibles.

US breakdown of cannabis form factors
Source: Organigram's Investor Presentation

And this has already played out in Canada, with the Ontario Cannabis Store (OCS) selling out of all gummies and soft chew edibles within 30 minutes of them being available for sale.  Edibles are a safer way to consume cannabis and do not have the social stigma attached to them as smoking joints does. 

And in this area, Canopy is well placed to roll out a range of derivative products that should sell very well. These include cannabis chocolates and three cannabis-infused beverage products. The beverages market is set to be a very large market and many of the LPs have been gearing up for this. Canopy's relationship with Constellation certainly gives them an advantage over their peers, and they are also eyeing the multi-billion dollar sports drink market through their acquisition of BioSteel Sports Nutrition late last year.

Brick-and-mortar on the rise

One of the biggest issues with Legalisation 1.0 was the fact that there were very few places consumers could physically go and buy cannabis for recreational use. In fact, Ontario – the most populous Province – started Day One with no retail stores at all. The government acknowledged this error and have committed to the opening of 20 new stores per month from March this year. Greater availability of the right product should ensure rising retail sales.

Cannabis retail outlet numbers per Province in Canada
Source: Lift and Co

The same is being played out in Alberta. Even though they started legalisation with a few retail outlets, as a result of significant supply shortages in the early days, they placed a moratorium on any new retail licenses being issued, which in turn paralysed any growth in the Province. This moratorium has been lifted and the Provincial government has also committed to more store openings in 2020. The availability to gain the right product will certainly help Canopy as they roll out their collection of 2.0 offerings.

US-preppers

Just like the TV show Doomsday Preppers, where people get everything ready for the potential of a cataclysmic outcome or a nuclear war, Canopy Growth has also been prepping and getting ready for the largest market in the world to open up – the good old US of A.

The company has a conditional purchase agreement with Acreage Holdings in place (conditional on the US legalising cannabis at the Federal level) and although we feel this is a 21/22 event, with the Presidential elections this November, there could well be a last-minute run on cannabis legalisation, as many of the Democratic candidates have already demonstrated their pro-cannabis stance. In addition to recreational coverage, Canopy also entered the US last year with the announcement of the development of an industrial Hemp Park in the outer region of New York. 

With hemp legalised through the Farm Bill of 2018, this allows Canopy to gain market share and brand awareness in the US, prior to any legalisation changes. The US is massive, and Canopy is very well positioned to take advantage of this market as it opens up.

Disclaimer: Past performance is not an indicator of future performance.

Should you be buying Canopy Growth?

Canopy was looking to launch its chocolate and beverages range in January this year. However, on the 17th January, the company announced that due to delays in getting their bottling plant ready for commercial production, they would not be launching their beverage range this month. They launched with a very small range of chocolates and – importantly – no vapes.

However, even after this announcement, the stock did not get punished and this was a clear indication that investors were not too concerned over this short term issue, and are taking a longer-term view of the company.

With the largest cash balance of any cannabis company, a new laser-focused, fiscally prudent CEO, and the backing of one of the largest beverage companies in the world, Canopy is very well placed for significant growth over the coming 24 months, and we believe that they will continue to be the market leader for many years. 

Constellation did its second investment tranche at $48 per share. No doubt they will be looking to get back to that level (at a minimum) in the very near term. That offers investors a 50% upside from the current price, and with the long-term outlook on Canopy Growth bullish, this could well be the time to dollar average down or initiate a position.


This could be one of the best investing opportunities of 2020

Legislative changes are blowing through the US, and with it, an ever-increasing number of states legalising cannabis for recreational use.

With the success seen in Illinois, which legalised for adult-use on January 1 and saw products moving off the shelf at an unprecedented rate, this company is primed to take advantage of the booming US recreational market.

They have secured partnerships with the biggest cannabis companies in the US, and their portfolio is second to none.

And with the sector-wide pullback of 2019, this company is now at a bargain-basement price.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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