Any Reason To Buy Canopy Growth After Brief Marijuana Stocks Rally?

Canadian pot producer Canopy Growth (CGC) this month announced two executive departures and a board resignation, after pushing back its profitability targets. So is there any reason to buy CGC stock now?

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In a filing dated Nov. 29, Canopy said that Bill Newlands, the CEO of Constellation Brands (STZ), a major investor in Canopy, had resigned from Canopy’s board of directors. He resigned on Nov. 24. The board appointed Garth Hankinson, Constellation’s CFO, the same day.

Canopy this month also said that CFO Mike Lee and Chief Product Officer Rade Kovacevic would leave Canopy on Dec. 31. Judy Hong will serve as interim CFO. Tara Rozalowsky will become the interim chief product officer.

Canopy said the changes were “designed to drive execution” toward its priorities. Analysts had their concerns.

“We believe the changes point to an organization in disarray with necessary strategic/personnel changes unlikely given Constellation Brands’ control of the board,” Stifel analyst Andrew Carter said in a research note.

Constellation, best known as the distributor of Corona and other alcoholic beverages, invested nearly $4 billion in Canopy in 2018. Canopy CEO David Klein is Constellation’s former CFO.

“All investors have to consider Constellation’s outsized influence and position of strength in concert with the beverage giant’s poor track record which we believe has demonstrated a complete misunderstanding of the cannabis consumer, the industry, the inefficient capital markets dynamics, and U.S. federal reform prospects,” Carter said.

“We believe the beverage giant is an impediment to necessary strategic/personnel changes,” he continued.

Other Difficulties For CGC Stock, Marijuana Stocks

Elsewhere, marijuana stocks gave up gains after GOP Rep. Nancy Mace of South Carolina introduced a bill that would federally decriminalize cannabis. The bill would take a more business-friendly approach to excise taxes but offer lighter social-justice reform than bills put forth by Democrats.

The bill has the support of the Koch-backed Americans for Prosperity, a conservative advocacy group, and has been pitched as a partisan middle ground on cannabis reform. Some analysts said they believed it was unlikely to pass.

But even with full legalization, setting up infrastructure and competing in the U.S. could be difficult for Canopy and other Canadian producers looking to advance south. Canopy Growth and its rivals have also faced their share of trouble at home.

In November, Canopy reported a narrower-than-expected Q2 loss but sales that missed expectations.

The company said it would postpone its timeline for hitting positive adjusted EBITDA — or earnings before interest, taxes, depreciation and amortization — amid competition in Canada for more potent strains and a slow distribution rollout in the U.S., particularly in its BioSteel sports-nutrition segment.

Earlier, Canopy said it hoped to reach that adjusted profitability target by the end of its current fiscal year.

“Consumers are increasingly looking for higher THC offerings in the flower category and we did not shift our growth strategy fast enough to capitalize on this during the quarter,” Klein said during Canopy’s earnings call.

Management said it was focused on shoring up its recreational market share in Canada and focusing on high-THC bud. But those efforts, Klein said, “will take time.” The company also announced that it would close a greenhouse in Niagara-on-the-Lake, according to reports, marking its latest effort to scale back.

After continued losses and layoffs — despite pandemic-related government aid, Marijuana Business Daily notes — and a lot of talk this year about the potential for U.S. legalization, analysts were not impressed.

“In our view, the stock now lacks an identifiable catalyst,” CFRA analyst Garrett Nelson said in a research note.

CGC Stock And The U.S.

The results arrived as Canopy seeks more ways into the U.S., a far bigger pot market than Canada, and where lawmakers this year have made efforts to chip away at federal restrictions. Canopy also has an agreement in place to buy U.S. peer Acreage Holdings once pot is federally legalized in the nation. It also has an online CBD business in the U.S. and an investment in TerrAscend.

Recently, Canopy also entered into an agreement that will allow it to buy U.S. edibles maker Wana Brands once federal laws in the U.S. permit. Stifel analysts raised questions about the deal’s price tag and whether Wana was a “leading edibles brand” in North America, as Canopy suggested in its press release.

CGC Stock Fundamental Analysis

CGC stock has a market cap of around $4.1 billion, according to MarketSmith. It is no longer the most valuable Canadian pot stock on a major U.S. exchange. That status now belongs to Tilray (TLRY), which is worth around $4.4 billion.

The EPS Rating of Canopy Growth stock, a measure of profit growth on a scale of 1 to 99, is 54. Earnings growth is a hallmark of top stocks. Like other big marijuana stocks, Canopy has lost money after over-investing in expansion and production.

Wall Street still expects Canopy Growth to put up a per-share profit by the end of the current fiscal year, which began in April, according to FactSet. But it expects losses to continue in the fiscal year after that. The stock also has a not-great SMR Rating of D.

CGC stock has a Composite Rating of 11 out of a best-possible 99, according to MarketSmith. Investor’s Business Daily research shows the biggest stock winners typically have Composite Ratings in the 90s.

CGC Stock Technicals

IBD advises investors to buy stocks only after they set up in proper bases and rise above certain resistance levels, called buy points. But for Canopy, no such base pattern has formed, meaning no new buy point is in play.

Shares soared as high as 56.50 in February, amid this year’s meme-stocks frenzy and greater legalization hopes in the U.S. But they have since wiped away those gains. CGC stock has lost support at its 50-day line. The stock is well below its 200-day line.

Canopy’s relative strength line, which compares its stock performance with that of the S&P 500, has fallen since February. The stock’s Accumulation/Distribution grade of D indicates more selling than buying by institutional investors.

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Is Canopy Growth Stock A Buy?

Bottom line: Canopy Growth stock is not in a buy zone, so it isn’t a buy right now.

IBD’s research shows investors would be better off looking for stocks with stronger fundamentals and that are closer to their highs.

Check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.

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