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.