As Pot Reform News Fades, Avoid Canopy Growth Stock

Stocks to sell
  • Excitement stemming from possible U.S. pot reform has dissipated and Canopy Growth (CGC) stock is again moving lower.
  • While better positioned to capitalize on pot reform than peers, other issues will likely push it to lower prices.
  • Much like how you should “just say no” to Hexo (HEXO), the same applies here with Canopy.
Source: T. Schneider / Shutterstock

After months of falling out of favor, Canada-based pot stocks like Canopy Growth (NASDAQ:CGC) saw a brief boost in late March. CGC stock, much like Hexo (NASDAQ:HEXO), zoomed on the latest news related to the full legalization of marijuana by the U.S. Federal Government.

Yet, the hype around this is taking a breather. That is why Canopy, Hexo, and the rest of the Canadian cannabis plays have pulled back. It is looking less likely that there will be additional progress on U.S. pot legalization.

Admittedly, unlike Hexo, Canopy is better positioned to capitalize on U.S. pot reform if/when it happens. However, issues with its existing business will outweigh this in the meantime. This points to the stock, down over 75% over the past year, making its way to lower prices.

In short, despite having fewer troubles than its direct peers, it is best to stay away.

CGC Canopy Growth Corporation $5.93

Why Legalization Buzz is Waning for CGC Stock

So, what exactly was this legalization buzz that cropped up among the Canadian pot stocks a few weeks back? In late March, the U.S. House of Representatives moved ahead with its pot legalization bill, known as the MORE Act.

On Apr. 1, this chamber of the U.S. Congress passed the bill, which removes cannabis’s status as a controlled substance on the Federal level. But while this is definitely a step for pot reform, that is not to say that reform is just around the corner. There is a slim chance this bill will make it through the U.S. Senate and to President Joe Biden, who would sign it into law.

There is also a bill in the works from Democrats in the Senate. However, this bill also has a slim chance of passage. Unfortunately, there are more than enough lawmakers in the Senate who remain against legalization. This will likely prevent it from getting a filibuster-proof majority.

In time, as this becomes more of a bipartisan issue, there is a strong chance reform happens. Still, knowing that pot reform isn’t on the immediate horizon, the market is correctly bidding down CGC stock and its peers.

While No Hexo, it Still Has More Room to Drop

Again, the argument I made for Hexo isn’t 100% the same when it comes to Canopy Growth. It is simple to make the case why this is one of the Canada-based pot companies well-positioned to capitalize on U.S. pot legalization.

With over $1.4 billion in cash and short-term investments, plus its standing agreement to buy Acreage Holdings (OTCMKTS:ACRHF) when the U.S. market fully opens up, it could become a major name in a fully-legal American cannabis market. But in the meantime, issues with its existing business could apply additional pressure on the stock.

In its home market, getting to the point of profitability remains a challenge. Although working to cut costs, management has opted not to provide a timetable for when it expects to get out of the red. If that is not bad enough, revenue growth next fiscal year (ending March 2023) is expected to come in at just 13.5%.

Yes, for more mature companies, 13.5% revenue growth would be nothing to sneeze at. However, for a company in what is seen as a growing industry, it is definitely not cause for celebration. As disappointment continues, chances are that CGC stock will continue to see its once-lofty valuation contract.

The Verdict on CGC Stock

Again, just like Hexo, Canopy Growth currently earns an “F” rating in my Portfolio Grader. Even as it has far more to gain from U.S. pot reform than its smaller, more poorly-capitalized peer, that is not enough to outweigh its other problems.

As the latest buzz on U.S. marijuana legalization continues to wear off, Canopy’s existing operations will come back into focus. That is bad news for sure. As revenue growth underwhelms and the company remains in the red, there is not much to prevent it from falling to lower price levels.

Downside risk with this particular Canada-based pot purveyor may not be as substantial as it is with Hexo, or some of the other names starved of cash. Yet, having less downside and murky upside is hardly an invitation to buy.

My summary of CGC stock might sound cliché, but to borrow a popular phrase somewhat related to this topic, I would reply, “just say no.”

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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