CGC: Is Canopy Growth a Smart Long-term Buy?

Though cannabis stocks had a dismal 2019, investors entered into 2020 with renewed optimism, because more states in the US were expected to legalize marijuana and Cannabis 2.0.

Unfortunately, the world has been hit with the coronavirus pandemic, which has stunted growth within the cannabis industry.

Canopy Growth (CGC), the world’s largest cannabis company by market cap, also has seen challenges thus far in 2020. They have been struggling to generate revenues, consolidate their balance sheet, and become profitable.

However, CGC is the market leader in the Canadian adult-use recreational marijuana market and one of the top players in Germany, home to the largest medical cannabis market outside of North America.

CGC also has plenty of cash on their balance sheet from the multi-billion dollar investment from Constellation Brands (STZ). Although cash alone will not be enough to create a successful company, in this challenging environment, it’s very valuable because it gives them the ability to weather the economic storm we are currently in.

So, with this in mind, is CGC a smart long-term buy for investors?

Constellation Brands (STZ) seems to think so.

At the end of last week, CGC announced the exercise of 18,876,901 warrants by Greenstar Canada Investment Limited Partnership to purchase common shares of CGC. Greenstar Canada Investment Limited Partnership is an indirect, wholly-owned subsidiary of Constellation Brands (STZ).

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The warrants, which were originally issued on November 2, 2017, were exercised at an exercise price of C$12.9783 per common share for an aggregate of approximately C$245 million. This effectively injects C$245 million dollars into CGC from STZ.

Bill Newlands, president, and chief executive officer at STZ had some positive remarks regarding the transaction, “While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial. Canopy is best positioned to win in the emerging cannabis space and we are confident in the strategic direction of the company under David Klein and his team.”

David Klein, chief executive officer at CGC stated that, “This additional investment validates the work our team has done since attracting the initial investment in 2017. It also strengthens our ability to pursue the immense market and product opportunities available to Canopy in Canada, the U.S., and other key global markets.”

By exercising these warrants, it can be interpreted that STZ believes that at current valuations, CGC’s stock is a good investment. And it shows that STZ has confidence in CGC’s future, as a premier global cannabis company.

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CGC shares were trading at $15.38 per share on Wednesday afternoon, down $0.38 (-2.41%). Year-to-date, CGC has declined -27.07%, versus a -10.55% 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...