Cannabis isn’t going away, and when momentum returns, Canopy Growth (NYSE:CGC) will be the one that feels the lift. CGC stock is the true leader among cannabis stocks. But when the industry is under pressure, leadership can be a bad thing.
For instance, when the cannabis trade started to break down in summer 2019, CGC stock had no way of avoiding the pain. While there are many lower-quality companies in the space — like Tilray (NASDAQ:TLRY) and Aurora Cannabis (NYSE:ACB) — traders viewed Canopy as a go-to short. After all, it was well known, had a large market capitalization and plenty of liquidity.
That headwind can also be a tailwind, though. When momentum returns to the cannabis group — and one could argue that it already is — Canopy Growth will be a go-to trade for all the same reasons.
However, it will also be a go-to because of its leadership in the space, strong balance sheet and potential for mergers and acquisitions.
Why Canopy Growth Is a Leader
Shares of Canopy Growth were trading quite well from mid-May into the end of the month. From low to high, shares rallied more than 70% ahead of earnings. Of course, CGC took a bath on earnings, falling 20% the day of the results and then bleeding a bit lower in the following sessions.
However, that shouldn’t overshadow its superior standing within the group. In its most recent earnings report, Canopy’s balance sheet proved that very point. While there was definitely a year-over-year decline in total and current assets, this class easily outweighs the company’s liabilities.
For instance, current assets stand at 2.5 billion CAD, down from 4.9 billion CAD in the same period a year ago. While down considerably, this figure easily outweighs the 420 million CAD in current liabilities.
Total assets of 6.9 billion CAD still dominate total liabilities of just 1.6 billion CAD, although the former figure did decline from 8.6 billion CAD year-over-year.
But this balance sheet ratio is what will help keep Canopy Growth alive during times of trouble. It’s why it’s in a better position than Aurora Cannabis, Tilray and others. We want this balance sheet strength to eventually be a product of Canopy’s superior business. Unfortunately though, the business is experiencing quite a bit of volatility at the moment.
Instead, the balance sheet strength comes from Constellation Brands (NYSE:STZ). In early May, Constellation exercised more of its warrants, giving it a 38.6% stake in CGC stock. The thought is, Constellation may eventually acquire Canopy Growth, which should bode well for stakeholders.
If Constellation were to exercise all of its warrants, it would take majority control at roughly 55.8%.
Sizing Up CGC Stock
A few years ago, cannabis stocks were all the rage. Investors thought this group would go to the moon based on recreational and medical use. States and countries were legalizing marijuana and the investment dollars were pouring in. But the road hasn’t been so smooth, with many of these stocks seeing massive volatility over the years.
We had a big shakeout in 2019 and it’s left a trail of pain for investors. That doesn’t mean the industry is dead, but it will leave investors wanting to go with the highest quality players. In my view, that’s CGC stock.
Thirteen months ago, this stock was north of $50. In March of this year, it was below $10. That shows you what we’re working with here. The group has been gaining momentum as of late though, with CGC stock rallying almost 9% on June 8. Maybe this group will become the next cruise or airline industry and squeeze higher.
The post-earnings dip sapped much of the stock’s momentum, but gave investors a great opportunity to buy the dip. For now, it’s forming a higher low and if it can fill the gap up toward $20, it will reclaim the 200-day moving average.
I like Canopy Growth stock on the dips, as it remains the industry leader.