Stone Fox Capital

About the Author Stone Fox Capital

Stone Fox Capital Advisors is a registered investment advisor founded in 2010. The firm offers portfolio management with a focus on opportunistic stocks providing secular growth trends at an affordable value. An emphasis is placed on fundamental analysis though charts are used for timing entry and exit points. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA. Invest with Stone Fox Capital's model Net Payout Yields portfolio on IB Asset Management as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here: Follow Mark on twitter: @stonefoxcapital

Canopy Growth (CGC): When a Bullish Call Isn’t Even Bullish

A key to investing is understanding the market impact of analyst calls whether bullish or bearish. In the case of Canopy Growth (CGC), the market initially reacted positively to a supposedly bull call on the stock. By the next day, the stock was at a new low for a very obvious reason.

Not So Bullish Call

On Monday, Seaport Global analyst Brett Hundley upgraded Canopy Growth to a Buy and placed a $31 target on the stock, which implies about 30% upside from current levels. (To watch Hundley’s track record, click here)

The cannabis stock initially traded back up to $25, but has now collapsed to new 52-week lows below $24.

The problem here is that Canopy Growth traded above $50 as recently as April and an all-time high near $60. In essence, any investor buying in the last year is down on their position and a Buy call 50% below the highs isn’t very comforting.

Investors still holding onto the stock from the $40s expected the stock to rally back towards new highs, not a minimal really back to $31. People have to decide whether holding Canopy Growth is even worth it now causing even more selling pressure while the risk of the a cannabis stock isn’t worth only 30%.

Will $20 Hold

The cannabis stock is about 15% away from cratering to the unthinkable price mid-year of $20.  With 345 million shares outstanding, the stock has a current market cap of $8.1 billion and would dip down to only $7.0 billion.

Despite being very bearish on Canopy Growth this year, the stock would turn more appealing at this level. With a cash balance of $2.3 billion the large Canadian cannabis company would see the enterprise value dip to only $4.7 billion.

Canopy Growth needs to make a couple of big moves to confirm a bullish reversal in the stock: hire a compelling full-time CEO and address the large losses.

The founding CEO was fired at the start of July and the interim CEO expects to leave the company. A new CEO is needed to clear the deck and reinforce the going forward strategy of Constellation Brands.

The June quarter produced another quarter where gross margins were below 20% and EBITDA losses were a horrible C$92 million. Canopy Growth has to quit chasing so much business all around the globe at the hit to margins and profits. A new CEO may need to rationalize some of the prior business decisions and acquisitions that are pressuring margins.

A company with FY21 revenue goals approaching $1 billion becomes far more appealing with a new CEO and an enterprise valuation of only $4.7 billion. As well, a product focus on Cannabis 2.0 with a key of taping into the infused beverage market would revitalize the market interest in Canopy Growth. The company already has a facility on their Smith Falls Campus devoted to the capacity to produce 5 million beverages per month along with 2 million vapes and 850,000 chocolates.


The key investor takeaway is that the market is trying to figure out the true value of Canopy Growth. A bullish call on the stock actually had the effect of reinforcing a negative thesis.

The stock becomes appealing down near $20 after a new CEO is hired to clean up the business. Too much risk exists in the stock until a new executive leader is in place.

Disclosure: No position.


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