Canopy Growth Corp (WEED): Reasons to Go Contrarian in 2019


Canopy Growth Corp (TSE: WEED) shares are trending after Seaport Global Securities upgraded the stock, taking a different approach from the broader market since the cannabis company posted earnings that missed analysts’ forecasts. Seaport’s analyst Brett Hundley upgraded the stock to “Buy” from “Neutral” and set a price target of $31 per share.

The analyst said in his report that even though the regulatory activity is disappointing, there is “no question” that cannabis presents an attractive profile. The analyst added that the Canadian space is set to gain a “fair amount” of pricing growth.

Starting October, edible cannabis products like cannabis-infused gums will go on sale in Canada. This would be a huge boost to the cannabis stocks in the U.S and Canada, and would further pave way for broader legalization.

Data shows that legal cannabis market is expected to have a total worth of over $66 billion by 2025. Albeit the short-term problems and resistance analysts think that sooner or rather the cannabis products will be legalized in the U.S.

Canopy Growth investors were shocked when the company posted a wide-than-expected loss for the first quarter of 2019. In the quarter, the company booked a one-time charge of C$1.2 billion related to the expiry of warrants held by Constellation Brands, which holds a major stake in the company. The stock tumbled after the quarterly results but we believe it’s a short-term loss and the stock has several growth catalysts for the future.

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Canopy Growth Corp (TSE: WEED) has a strong backing of Constellation Brands, which has a whopping $4 billion worth of stake in the cannabis company. The company has several cannabis products licensed in Canada. On Aug. 20, health authorities in Canada licensed Canopy Growth’s (NYSE: CGC) KeyLeaf Life Sciences facility in Saskatoon, Saskatchewan. The facility will go online this fall and would be able to generate up to 5,000 KG of hemp per day.

One of the reasons why Canopy Growth stock is suffering is because of the latest firing of its founding CEO Bruce Linton. The move was the result of the rift between the departed CEO and Constellation Brands. We believe that it will take some time for the company to fix its leadership holes and uncertainty, but it will come out of the current crisis. There’s also a hope that the upcoming leadership would solve the company’s core problems, including the problem related to massive cash-burn rate.

In the first quarter, Canopy’s cash at hand declined to C$3.1 billion, a decrease of C$1.4 billion from C$4.5 billion in March. This was mainly due to the acquisition of C3 and This Works (C$431 million), infrastructure spending (C$212 million) and operating cash flows (C$158 million)

The author does not own any of the stocks discussed in this article.