Up 38% in 2020, Is Canopy Growth Still a Buy?

Amid the coronavirus disease 2019 (COVID-19) pandemic chaos, North American marijuana stocks have done surprisingly well. The cannabis-focused Horizons Marijuana Life Sciences ETF has jumped by a low double-digit percentage on a year-to-date basis through this past weekend…

But the largest marijuana stock in the world has delivered even more impressive returns. Canopy Growth (NASDAQ:CGC), the only large-cap pure-play pot stock, has gained 38% since the year began, and has more than doubled since the beginning of October.

Can this amazing run continue? Or would investors be wise to avoid the biggest marijuana stock? Let’s take a closer look by analyzing the buy and avoid arguments.

Here’s why Canopy Growth may offer additional upside

Being the biggest pot stock by market cap comes with its perks. One of Canopy’s noteworthy advantages is its close-knit relationship with spirits giant Constellation Brands (NYSE:STZ). Constellation has made four direct and indirect investments into Canopy since October 2017 and currently holds a 38.6% stake in the company. With such a large take, Constellation has a vested interest in Canopy’s success. This means collaborating on higher-margin cannabis derivatives and marketing or distribution assistance, when necessary.

In addition to having a high-profile equity stakeholder, Canopy Growth is also sporting an insane amount of cash, cash equivalents, and short-term investments, most of which is derived from Constellation’s equity stakes. Canopy ended September with $1.72 billion Canadian ($1.32 billion U.S.), which is more capital than any other marijuana stock. This gives the company and its relatively new CEO David Klein, the former CFO of Constellation Brands, plenty of financial flexibility.

That brings me to my next bull thesis: Klein’s no-nonsense business approach. Prior to Klein taking the helm in January 2020, Canopy Growth was hemorrhaging cash and losing a monstrous amount of money. Since taking over, Klein has shuttered over 3 million square feet of licensed indoor greenhouse space, reduced headcount, and dramatically cut share-based compensation. In the most recent fiscal quarter, share-based compensation declined to CA$22 million from CA$92.9 in year-ago quarter.

Lastly, there’s optimism surrounding Joe Biden’s victory last month. President-elect Biden has offered to reschedule cannabis and decriminalize the drug, raising hope that Canopy Growth might soon be able to…

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