Why Canopy Growth’s Deals May Not Translate Into Gains for CGC Stock

CGC stock remains in a range as Canopy Growth solidifies its market leadership

By Will Healy, InvestorPlace Contributor

Canopy Growth (NYSE:CGC) moved higher after announcing a deal with its investment arm, Canopy Rivers (OTCMKTS:CNPOF). This offers some relief to CGC stock, which had returned to levels not seen since before they announced their buyout intentions on Acreage Holdings (OTCMKTS:ACRGF).

Unfortunately, Canopy Growth stock seems to need more. CGC has again sold off after briefly crossing the $50 per share mark in late April. While the deals with Canopy Rivers and Acreage boost the long-term prospects of Canopy Growth Corporation, they also show the difficulty of breaking CGC stock out of its current trading range.

Canopy Growth Continues to Improve Market Positioning

Canopy Rivers announced that the portfolio company it owns, PharmHouse Inc., will commit more of its production to Canopy Growth. CGC will now buy an additional 20% of PharmHouse’s output for the next three years. PharmHouse had previously committed 10% of its flowering space to Canopy Growth.

Still, despite what the PharmHouse deal means to Canopy Growth, much of the focus has settled on mergers and acquisitions (M&A). The latest M&A deal for Canopy involves a buyout of New York-based Acreage Holdings. However, in reality, one could better describe this “agreement” as an option. The deal will not close until recreational weed becomes legal across the U.S.

I agree with my InvestorPlace colleague Tom Taulli that the alliance with Constellation Brands (NYSE:STZ) alliance holds Canopy Growth in good stead. I also believe the company has positioned itself for a leadership position in the U.S. in both hemp and cannabidiol (CBD). This benefits the firm without regard to what happens with the Acreage deal. I also see Canopy Growth remaining the market leader in North America when U.S.-based companies can operate with full legal status.

Investors Should Separate Canopy Growth, CGC stock

Still, what helps Canopy Growth may or may not boost Canopy Growth stock. The current hype regarding marijuana stocks renders the price-to-sales (P/S) ratio of around 135X meaningless. However, it also leaves investors without a valuation-based metric with which to evaluate CGC stock.

Hence, this leaves investors with the charts as a guide. For all of the hype, Canopy Growth stock has twice pulled back after spiking above $55 per share in intraday trading. In recent weeks, even the Acreage deal could not keep CGC stock above $50 per share. Moreover, since Jan. 15, it has rarely moved below $40 per share or above $50 per share.

CGC Stock Has Become Range-Bound

Despite its elevated multiple, I do not think it will break through the lower end of the range unless a recession occurs, or the U.S. suddenly makes cannabis legal.

For now, traders have focused on when and how CGC stock will break through on the high end of the range. The elevated P/S ratio will struggle to go even higher without further stimulus. However, seeing the rally fizzle after the stock moved past $50 per share could make one wonder whether stimulus truly helps. Moreover, seeing marijuana stocks (including CGC) tank after weed became officially legal in Canada remains fresh on investor’s minds. It also shows the strange and powerful phenomenon of illegality driving cannabis equities.

Like most, I believe CGC stock will trade at higher levels years from now. However, until we see the stock stay above $55 per share, I do not think that the higher stock price will come in the near term.

Final Thoughts on CGC Stock

CGC stock trades near the high end of its range, and I expect CGC will stay in the range. The PharmHouse deal serves as yet another confirmation that the growth story remains intact for Canopy Growth. However, it will likely not have a material effect on Canopy Growth stock.

Moreover, before the company announced this deal, CGC had fallen back to levels it saw before they announced the Acreage Holdings deal. Simply put, CGC stock has become range-bound.

The prospects of the cannabis industry should keep Canopy Growth stock at an elevated multiple in the near term. However, even a major coup such as the Acreage deal has failed to put CGC stock back on a growth trajectory.

The Acreage and the PharmHouse deals show that Canopy Growth has both the strategic vision and the product needed to lead the marijuana industry. Unfortunately, translating this insight into near-term growth for Canopy Growth stock will prove more elusive.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 

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