The cannabis industry has been on a tear recently with many cannabis stocks easily doubling in value over the past two months. One recent driver for the rally is that investors have been speculating that Joe Biden’s election win will create a more favorable environment for cannabis companies. One stock in particular, Canopy Growth (CGC), has gained about 90% since September 30th.
The problem I see with this rally is that investors sometimes have had a hard time distinguishing which companies will actually benefit, and which companies’ recent gains have been fueled by pure speculation. I believe that the MSO’s (Multi-State Operators) will be the real winners and their Canadian counterparts may have a harder time until there is federal legalization in the US.
The best way for Canadian cannabis companies to generate revenues south of their border without jeopardizing their listing on the NYSE or NASDAQ, has been through acquisitions or partnerships. Luckily for CGC, Constellation Brands (STZ), a world-renowned beverage company, has invested a large amount of capital into the company.
This investment benefits CGC as it has not had to worry about cash or initiating any forms of dilutive financing over the past two years. While many cannabis companies have struggled during these tough times, STZ’s investment has enabled CGC to weather the storm. But CGC is still a way off from profitability.
On Wednesday, CGC announced a series of Canadian operational changes that are designed to streamline its operations and further improve margins. As per CGC’s press release, the company stated that they will cease operations at the following sites: St. John’s, Newfoundland and Labrador; Fredericton, New Brunswick; Edmonton, Alberta; Bowmanville, Ontario as well as its outdoor cannabis grow operations in Saskatchewan. Approximately 220 employees have been impacted as a result of these closures. These actions will be an important step towards achieving their targeted $150-$200MM of cost savings and accelerating their path to profitability.
In regards to this announcement, CGC CEO David Klein said, “This was a difficult decision but I believe it is the right one. I want to thank all of the employees impacted by this decision for their efforts in helping build Canopy Growth. “
As CGC continues to streamline its business and reduce SG&A costs, its financial position should continue to improve. I have been a fan of David Klein since he took the helm earlier this year and I remain hopeful that the company can achieve profitability in the near future.
However, in terms of its stock’s performance, I don’t expect any more substantial gains in CGC in the near term. With the stock almost doubling in a very short period of time investors may want to take a wait and see approach over the next couple of months.
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CGC shares fell $0.12 (-0.44%) in premarket trading Friday. Year-to-date, CGC has gained 29.11%, versus a 14.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...
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