Canopy Growth Corp. (NYSE: CGC) disappointed investors with its quarterly earnings. In fact, investors were so “disappointed” by this one report they sent the entire cannabis sector tumbling.
That’s the thing: Canopy’s results mean essentially nothing at all for American marijuana companies – nothing for any company outside Canada, in fact.
It’s no different than if, say, California-based PG&E Corp. (NYSE: PCG) shares tanked because Consolidated Edison Inc. (NYSE: ED) had a power failure in New York City
But we’re still in the early stages of legal cannabis’ explosive growth potential; any one of these three stocks, for instance, could soar up to 1,000%.
Canopy led the sector down because investors are expecting results yesterday. And the results can be longer in coming than short-sighted investors might like.
So before you run out and sell all your Canopy shares, you need to see what I’m about to show you…
Canopy’s Miss Wasn’t All That Bad
The worst result Canopy reported was a decline in Canadian recreational sales. But almost all of the decline occurred because of a strategic mistake the company made – a mistake Canopy hasn’t fully owned up to.
Specifically, Canopy made too much cannabis oil and too many softgels. Canopy hasn’t fully owned up to this mistake. We can’t know what the company was thinking for certain, but I suspect it placed too much hope (and not enough research) on what recreational consumers want.
Oils and softgels are very popular with medical patients, but recreational consumers apparently associate them with medical applications. They don’t want them for recreational purposes the way people want to vape or eat a gummy.
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Whatever the reason, Canopy didn’t ship a lot of oil or gels during the quarter, and it established a reserve for product returns. Under accounting rules, that counts as a reduction in sales.
That didn’t help things this quarter, but even without that debacle, the revenue would still not have been very impressive. The company said that Canadian recreational sales were flat. Other companies are posting massive sales gains.
What that means in plain English is that Canopy lost significant market share during the quarter.
That’s an opportunity for the other producers. So far, some smaller producers have been able to take advantage of the opportunity.
Canopy had other problems.
Its costs are still too high, it took a huge write-down, and it does not yet have a long-term CEO at a time when bold, visionary leadership is exactly what’s called for.
This doesn’t sound great on the surface, but as I said, the overwhelming focus on “big” results right now is a little premature.
Canada’s first recreational marijuana sale was rung in less than a year ago. The first retail stores in Ontario – Canada’s most populous and richest province – opened last month.
Investors expecting the moon, not getting it, and selling their entire cannabis portfolio based on a single quarter’s result in the very first year of legalization are making a monumental, expensive mistake.
We’ve been here before…
I Saw This Happen in the Dot-Com Bust
Cannabis today reminds me of Amazon.com Inc. (NASDAQ: AMZN) during the early days of the commercial Internet industry.
Amazon.com was one of several companies fighting for dominance. It had money, some decent press exposure, as well as a huge number of incredibly smart people at the helm who made online ordering easier.
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Of course, the company still had its critics. In 1997, a few months before the company went public, two of the biggest journalists in America wrote an article called “Amazon.con.” People who bought Amazon when the company went public saw some painful declines.
Today, those investors would probably be happy to tell you horror stories from those days… It’s just that those stories will be told from the decks of their yachts.
Canopy’s long-term prospects are still just as bright as Amazon’s prospects were during those downturns.
For all the turmoil of the last quarter, Canopy still has a leading position in Canada. It is still acquiring one of the cannabis leaders in the United States. It has a head start in several other countries around the world, and it still has a massive amount of cash to fund further expansion.
In fact, one of those new initiatives was just unveiled. It’s a $150 million hemp industrial park in New York – the tip of the iceberg for hemp farming and CBD.
If you own Canopy shares, take a deep breath and take the long view. There’s more here than the the financial press (and let’s face it – the stock price) would have you believe.
What’s more, there are some ways to play Canopy’s bright future prospects without actually owning CGC shares.
There Are Three Ways to Play It
Of course, you can always approach the current situation as a “buy the dip” opportunity and grab CGC at a discount.
You can take the lowest-risk approach and buy Constellation Brands Inc. (NYSE: STZ).
Constellation pretty much controls Canopy. When the Canopy Growth stock price was dropping the day after earnings, Constellation shares actually climbed. You can learn more about why I think Constellation is a stock to buy and hold forever right here.
The third option is riskier, but you can buy shares of Acreage Holdings Inc. (OTCMKTS: ACRGF) and get Canopy as a discount when the merger is completed.
Outside of buying shares of Constellation Brands, that might be my favorite way to invest in Canopy right now. I’m confident the merger will go through, and your downside on Acreage is limited even if the merger is canceled.
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