This year brought the quietest 4/20 Day in a long time. There were no festive celebrations involving lots of people throughout the U.S. and Canada because of the coronavirus pandemic. And the biggest pure-play cannabis company in the world, Canopy Growth (CGC), was worth roughly less than…
one-third of its peak market cap in early 2019, shortly after the launch of Canada’s adult-use recreational marijuana market.
But it’s a pretty good bet that there’ll be more raucous 4/20 Day festivities as the new decade moves forward. I think that the chances are also pretty good that Canopy Growth will see brighter days. Here are three reasons Canopy Growth could bounce back in a big way over the next couple of years.
1. Greater fiscal discipline
The biggest knock against Canopy Growth in the past is that the company has spent money like crazy. This rampant spending ultimately led to founder Bruce Linton losing his job. However, it also led to Canopy hiring former Constellation Brands (NYSE:STZ) CFO David Klein as its new CEO.
Klein’s first quarterly conference call as Canopy Growth’s leader was in February. He said then that one of his top priorities was “to define a very visible path to profitability and positive cash flow.” Klein added, “This means we need to align our resources and investments with the size and growth rate of the market as it exists today.”
It didn’t take long for Klein to begin implementing greater fiscal discipline. Last week, Canopy Growth announced that it was slashing global operations in five countries, including withdrawing from its cannabis operations in Lesotho and South Africa.
While pulling back might seem like a negative, it actually should be a good thing for Canopy over the long run. As the company continues to closely evaluate where and how it invests capital, I expect that that “very visible path to profitability and positive cash flow” that David Klein promised will emerge. And when Canopy has a clear target for achieving profitability, my hunch is that investors will pile back into the stock.
2. Improving retail environment
One of the most significant hurdles for Canopy Growth and for its peers in the past has been the lack of enough retail cannabis stores, especially in Ontario, which is Canada’s most heavily populated province. The COVID-19 outbreak made the retail situation for Canopy even worse, with the company closing its company-owned Tokyo Smoke and Tweed retail stores temporarily.
The operative word, though, is “temporarily.” Canopy will reopen its retail cannabis stores in the not-too-distant future. In the meantime, Canadian customers can purchase its adult-use cannabis products online.
Ontario has also committed to issuing more licenses for retail cannabis stores. Although the coronavirus pandemic is preventing new stores from opening right now, it’s only a matter of time before the retail picture for the Canadian cannabis industry looks a lot better. As the retail environment improves, I expect that it will serve as a solid catalyst for Canopy Growth as well as for other top Canadian marijuana stocks.
3. Cannabis derivatives market
Some call it “Cannabis 2.0.” Others refer to it as “Rec 2.0.” Whatever term you want to use, the cannabis derivatives market in Canada should…
Continue reading at THE MOTLEY FOOL