Canopy Growth (NYSE:CGC) stock has been my top pick a a long-term winner in cannabis. After fiscal third quarter earnings last week, Canopy Growth stock remains my top pick.

Obviously, other investors agree. CGC stock gained 13% on Friday following the release. Other cannabis plays bounced as well.

The gains make sense. Canopy’s earnings admittedly don’t look all that impressive, and the company still is posting a loss. But a closer look shows why the report strengthens the long-term case for CGC stock.

Canopy Growth Beats Estimates

Canopy’s earnings came in well ahead of Wall Street estimates. Excluding the impact of one-time restructuring charges that hit reported second quarter sales, revenue grew 13% sequentially. Analysts were expecting a decline. A loss of 35 cents Canadian was 14 cents better than consensus.

Certainly, a quarter that topped Street expectations is good news for CGC stock. That’s doubly true given that another marijuana major, Aurora Cannabis (NYSE:ACB), missed estimates the day before.

The Q3 numbers also are a boost to the sector, which itself needed good news after Aurora’s miss. I’ve long tracked the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) as a proxy for investor sentiment toward cannabis stocks. MJ bounced 3.7% on Friday, and finally seems to be holding support around $16.

But even with Canopy’s beat, this is not the time to be blindly buying any cannabis stock. MJ still is down 58% from its 52-week high, after all. Overall industry growth remains slower than hoped. Companies in the sector are nearing a potential cash crunch. Some — and potentially even some big ones — will inevitably go bankrupt.

Even for CGC stock itself, simply beating Wall Street estimates isn’t alone a reason to buy the stock. It’s how Canopy Growth topped consensus, and the company’s commentary after the quarter, that truly support the long-term case.

Broad Strength in Revenue

A 13% increase in revenue quarter-over-quarter isn’t that impressive in the context of past expectations. In the current environment, however, it’s a strong performance.

After all, Aurora’s sales declined almost 10% q/q. And Canopy’s major catalysts haven’t even played out yet. The retail rollout in Canada remains slower than hoped amid a regulatory backlog. Cannabis 2.0 products like vapes and edibles will help in the fiscal fourth quarter and beyond. They had minimal effect on Q3, however.

Even with those headwinds, Canopy posted strong growth. And that growth was strong across the board. Recreational B2B (business to business) sales increased 8%. Direct-to-consumer increased 16% as the company’s retail strategy took hold. Medical sales rose 5% in that more mature market. International revenue rose by the same amount.

Canopy Growth is the leader in cannabis. Q3 shows not only that the company is still the leader, but that its lead is growing.

New Management

Owning the leader in a growing industry is a smart strategy, whether that leader is Canopy, Tesla (NASDAQ:TSLA), or telehealth play Teledoc (NYSE:TDOC). And while cannabis stocks will be winners long-term, the industry still faces short-term challenges.

That’s one reason why I’ve recommended selling covered calls on CGC stock in my Cannabis Cash Weekly service. And Canopy’s earnings show the impact of those challenges. Revenue growth did impress in the quarter. But Canopy still posted an Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss of 92 million CAD in the quarter. Its cash balance dropped some 400 million CAD.

Under new chief executive officer David Klein, however, the company is responding to the ‘new normal’ in cannabis. Klein told Yahoo! Finance after earnings — wisely — that the company would focus on executing in its existing business rather than buying new ones. It’s cutting costs as well. Operating expenses declined some 14% from the second quarter, and Canopy plans to tackle ballooning share-based compensation as well.

Investors cheered when Klein was hired from Constellation Brands (NYSE:STZ,NYSE:STZ.B), which owns a large stake in Canopy. The commentary after Q3 shows why. Klein has created a smart strategy for Canopy that will allow the company to ride out near-term headwinds — and from there, deliver long-term shareholder value.

CGC Stock Short- and Long-Term

Again, there are going to be bankruptcies in the cannabis industry. There’s simply no way around it at this point. Klein told Reuters last week that “there’s not a lot of market demand” for production facilities. A study from Ello Capital found that the average Canadian cannabis company has just six and a half months of cash remaining.

Those struggling companies are not going to be able to sell assets to keep themselves afloat. But Canopy Growth won’t have that problem. The $4 billion-plus investment from Constellation gives the company a fortress balance sheet.

As those rivals falter, Canopy can win two ways. First, its dominant market share should only expand. Second, it will have the opportunity to buy valuable assets — whether production facilities or retail brands — at distressed prices.

Of course, it takes a strong management team to execute on both fronts. And that’s part of why Canopy earnings help the bull case. Klein already has helped the company cut costs and improve execution. He’s proven that he’s not going to spend money now when assets could be cheaper six or twelve months from now.

Canopy already is the market leader in cannabis. Its position will only get stronger going forward. There may be more choppy trading as the industry undergoes an inevitable upheaval. But I expect Canopy will come out the other side in even better shape — and that the CGC stock price will be much, much higher.

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