Be Careful About Buying the Spike in Canopy Growth

Stock Market

On May 25, cannabis stocks got a boost on news that Congress may be ready to take up legislation to legalize marijuana. As the largest company in the space, Canopy Growth (NASDAQ:CGC) is participating in the rally. Shares of CGC stock surged as high as 8% from the prior day’s close. 

The More CGC Stock Flounders, the Less Constellation Can Handle It

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One of the difficulties in investing in any cannabis stock right now is the status of legalization in the U.S. Many investors and analysts jumped the gun when the Democratic party wrested control of both the executive and legislative branches of government. The thinking was, understandably, that legalization of recreational marijuana was as close as the stroke of a pen. 

As this news shows it still may be. Cannabis legalization is garnering support on both sides of the aisle. However, while the news is encouraging, I will continue to express caution. Cannabis investors have been here before. Maybe not with something so tangible as legislation on the floor of the House of Representatives, but they have had their hopes dashed in the past. 

Maybe that’s why for as high as CGC stock climbed, its gains are marginal for the year. Let’s take a closer look at the issues surrounding Canopy Growth stock. 

Earnings Will Provide More Data 

The legislative news is not the only thing propping up CGC stock. The company will report earnings on June 1. Such events are usually positive for stocks. And if Canopy delivers on analysts’ expectations, they will post a 40% improvement in earnings per share.  

While the company will not yet be profitable, it would be further evidence that it is moving in the right direction. This will be particularly true if Canopy continues to show revenue growth.  

At least one analyst, may think this is the case. Bill Kirk of MKM Partners upgraded CGC stock from neutral to buy with a price target of $55. That’s 53% higher than the consensus price target of $35.91. As part of his bullish call, Kirk noted the strength of the company’s CBD business in the United States. 

Control the Controllables 

Canopy Growth is the largest of the publicly traded cannabis companies. In and of itself, that should give investors confidence that Canopy will be around when the United States market is fully open. But the legislation that may be presented to Congress is out of Canopy’s control.  

The wheels of government generally move slowly. And that means that investors who are looking at CGC stock have to consider that there is no guarantee when or if this legislation will pass – or even be brought up for a vote.  

Also impacting Canopy Growth is a spike in Covid-19 cases in its home country of Canada. As Chris Tyler points out, this hurts the company’s retail business, which makes competing (and lower cost) products more appealing.  

 That doesn’t mean you have to avoid the stock entirely, but it does mean you shouldn’t lose your head over it. The cannabis opportunity is similar to the electric vehicle business. The growth is tantalizing close, but it’s not here yet. And the reasons for that are largely out of Canopy’s control.  

Be Cautiously Optimistic About CGC Stock 

When I look at the CGC stock chart, one thing seems clear. If you bought on the dips any time in the last three years you have been rewarded handsomely. And if you bought at one of the tops, you’re likely cursing your fate. This has not been a stock to chase on the way up.  

The question of course is, is this time different? Just three years ago, cannabis was a controversial industry with a long path to legalization. Today, it’s an industry that is still controversial (but receiving increasing acceptance). And is has what appears to be a shorter path to legalization.  

In other words, things are changing, but not as fast as investors would like. Until they do, investors will need patience in dealing with CGC stock.  

On the date of publication, Chris Markoch did not have (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 InvestorPlace.com Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019. 

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