Are Cannabis Stocks Dead?

The year was 2018-19, and Cannabis stocks were hot! All the cool kids were trading them. One of the market leaders, Canopy Growth was trading at $50 per share, and another, Tilray, was priced at more than $140 per share. Fast forward to 2023, and cannabis stocks have lost almost all their value. Both those market leader stocks are now down 98% from their all-time highs of 2018-19. 

​Cannabis stocks are either destined for bankruptcy, and 100% value loss or they are deeply-discounted opportunities we should pay attention to now.  Let's talk about that!

I'm Hoda Mehr, founder and CEO of Stock Card, and on this blog and the accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories. The rise and fall of cannabis stocks is a classic story of investors running wild after the next big thing, pushing the prices to levels completely disconnected from the economic reality behind the companies and stocks in that sector. Then suddenly and violently, everything comes down crashing. Almost all similar stock market stories start with a new shiny sector and end with investors losing almost all their capital.

I own a few shares of Canopy Growth in my portfolio, shining red hot at the bottom of the biggest losers. I purchased those shares in 2018 with a few justifications:

1. It was the leading company in the market.
2. Revenue was growing steadily.
3. Was a founder-led company at the time.
4. It received a $6B investment from the alcoholic beverage company Constellation Brands to create and distribute a line of cannabis-infused drinks.

Those were solid reasons to take the bet and buy 65 shares at $30 apiece. My investment almost doubled, with the company hitting an all-time high of about $50 and then crashing down to $1.5 per share the day of recording this video. I didn't sell at the top, nor have sold when I lost almost 94% of my investment. Losing the value of your investment if you don't need the cash isn't a good justification to sell. Only panicked investors do things like that. As a fundamental, long-term investor, I need to ask myself whether I see a reasonable path to recovery and whether I should buy even more. 
As Uncle Buffett puts it, if the price of hamburgers goes down, you don't stop eating them. You may even eat more.

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Of course, my portfolio isn't investment advice, neither are any of 100s of other real-money and idea portfolios on our platform. Use them as a resource for new ideas or validate your own ideas while doing your research. 

Now, how can Canopy Growth recover, grow and even thrive in the next ten years:

1. The overall cannabis market may grow rapidly, putting wind behind this almost sinking ship.
   
2. It can find a path to grow revenue. After all, we've seen nonalcoholic beverage brands such as Celsius setting record-breaking growth. Canopy Growth can and should be able to do similar.
   
3. Or, the company can find a way to run its operations efficiently, turning into a cash-generating and profitable stock. 
   

In the next few minutes will go through all three options and discuss whether any of the three routes is possible for Canopy Growth.​

Cannabis Industry Market Size

Despite everything happening with Cannabis stocks, the global cannabis market is expected to grow by 24% between 2022 and 2026. The industry was hit by COVID-related restrictions, especially as farming and processing cannabis needs in-person human labor. But, with the pandemic restrictions almost entirely eliminated, the industry is back on a growth track.

It's quite apparent that legalizing medical and recreational cannabis use is an important factor in driving growth. In the U.S. alone, 40 states and the District of Columbia have legalized medical use, and 21 states allow recreational use. Even in a state like Texas, bills are advancing to legalize medical use. While Federal level legalization is unlikely this year, President Biden has asked the Secretary of Health and the Attorney General to review cannabis's classification as a Schedule II drug which is good progress toward ultimate legalization. It also opens the door for more pharmaceuticals to start researching it as an ingredient which can lead to a significant demand increase by pharmaceuticals down the road. So, despite the stock price crashes, the cannabis industry is growing steadily.

Canopy Growth (CGC) Fundamental Analysis

If Canopy Growth can grow its revenue by at least 50% of the overall market rate, the stock will have major growth potential. Especially if you compare that with its 2022 5% revenue drop.

The question is whether Canopy Growth and its management believe that can achieve such growth. Let's see what they had to say in their latest investor presentation.

The company aspires to generate 50% of its revenue from the U.S. market instead of its current concentration in Canada. It's been investing in a portfolio of consumer-facing brands such as Acreage, Wana, Jetty, and TerrAscend, and plans to grow its own brands in the U.S. As a matter of fact, the company calls the U.S. legalization a once-in-a-generation opportunity. 

That's a good strategy. However, the company outlined several restructuring requirements to simplify its organization, especially related to Constellation Brands' investment in the company and acquisition deals related to Acerage, Jetty, and Wanna. It's also moving away from retail operations by divesting from its Canadian retail business to cut costs and improve margins in the long run. The restructurings are naturally dependent on shareholders' votes and regulatory approvals and are expected to continue until the end of 2024, more than a year and a half from now. So, it doesn't appear that the company is in a revenue growth mode and is figuring out its ownership structure for now. That's a short to mid-term risk. 

Aside from restructuring risks, there are some good news and progress toward improving the company's financial strengths.

• The first positive sign comes from non-cannabis-related product lines. Remember we talked about the growth potential in the non-alcoholic ready-to-drink beverage market with the example of Celsius. Interestingly, Canopy Growth's BioSteel hydration drink is its fastest-growing product line, with $27M in revenue in the quarter, up 299% compared to a year ago.Compare that with Celsius's $653.6M annual revenue, and CGC may have growth opportunities beyond cannabis. But it is a step away from its core cannabis operations. 
  
• The second positive sign comes from a modest topline revenue growth. Although last quarter's revenue was down, the drop is mostly due to its divestiture from the Canadian retail business. Without its impact, the company's revenue actually grew by 2%.

Besides that, Canopy Growth is still in a lot of financial trouble, including negative free cash flow, and it may still need to raise more capital or borrow to keep building the business.

The bottom line is that this company has growth potential and the right strategy but is struggling with many financial troubles. Things are moving in the right direction, but full recovery takes time and capital.

Should I Add To Canopy Growth Stocks?

If I park aside the fact that I bet on it back in 2018, I won't invest in CGC now. I wouldn't add to my holdings, even though we can now invest at 0.7 times book value and 2X sales. The price to book value lower than one reflects all the restructuring to convert notes and debt holders to common shareholders. That's not good for the current shareholders. 

And at $1.5 per share, investors are already baking twice the revenue growth in the price. I don't believe CGC is an undervalued stock, even at the current levels. 

Does this mean CGC would die and go away?

That's unlikely. It still holds more than $500M in cash, and any legalization news in the U.S. will bring momentum to the stock.  

So what should I do with my 65 shares if I don't believe it is an investable stock?

• I can use it for tax loss harvesting and save on paying capital gains taxes on other better-performing investments. By the way, I have an entire video talking about investment strategies for investors you should check out later. 
• Back to my CGC shares, there is another alternative. The industry is growing at a rapid pace, as we discussed before. CGC may be grappling with the financial restructuring. Most other individual companies in this space have had similar convertible note financing and may struggle with similar restructuring challenges. So no individual company is a safe bet. But an overall cannabis market ETF can be a better place to invest in the market's recovery. 

Which Cannabis ETF Is A Good Buy

For example, an ETF focusing on the cannabis industry with low or reasonable management fees and large enough assets under management can be a good choice. 

Most investors are familiar with Alternative Harvest ETF, ticker MJ. It's not a bad choice, with $230M in assets under management, 37 holdings, and more than seven years of operations history. But, with a 0.75% management fee, it is an expensive ETF. 

Alternatively, Global X Cannabis ETF, ticker POTX or Cambria Cannabis ETF (Ticker TOKE) can be good choices, too.

I prefer Cambria Cannabis ETF because of its low 0.45% management fee and exposure to pharmaceutical companies active in the cannabis research space among its top 25 holdings. It is run by Cambria ETF Trust, a company by Meb Faber, a very logical, steady, and value-driven investor. I trust his judgment. 

The risk with Cambria Cannabis ETF is that it has a very low asset under management around $11M, which adds the risk of running out of money and liquidation if the prices do not recover soon. 
 
I choose to sell my CGC shares, use the loss for tax loss harvesting, and then buy a few shares of Cambria Cannabis ETF to bet on the cannabis market's growth rate in the coming years. Reminding you that this isn't investment advice. 

Now it's your turn to do your research. I leave a link to MJ's ETF Card and CGC's stock card on our platform so you can research them too. Also, don't forget that you can get a full list of all stocks in the cannabis industry by typing cannabis in the show notes. I leave a link to that list in the show notes too. If you have a better strategy to bet on the cannabis industry, share it in the comments so we can all learn from each other.

I'll see you next time. 

Watch this episode on YouTube​