Ticker: NYSE: CGC
Current price: $37.44
Buy up to: $40
Dear First Stage Investor,
Cannabis stocks have been getting crushed right as Canada has begun selling legal recreational pot.
It’s a typical “sell the news” reaction. There were such high expectations going in, it’s an understandable response from investors when a legalization rally failed to appear.
But I think this pullback offers a nice buying opportunity. Estimates are that revenue in Canada alone could hit $5 billion to $10 billion in year one. That’s a big market, and it will grow both domestically and internationally.
Canopy Growth Corporation (NYSE: CGC) is the apparent market leader. It’s secured more than a third of Canada’s announced supply contracts for the recreational market today. It has the biggest war chest ($4 billion), huge growth operations, many of the best brands and a huge distribution network.
Canopy has also attracted high-quality investors like Constellation Brands. Constellation is a $38 billion beer, wine and spirits behemoth. You’ve probably heard of two of the drinks Constellation produces – Corona and Modelo.
In August, Constellation increased its stake in Canopy from 9.9% to 38%. Constellation paid $28.63 per share to acquire those shares.
What makes Canopy so attractive (besides the huge war chest, great brands and incredible distribution network)?
Canopy is focused on higher margin branded products, as founder Bruce Linton recently noted in an interview with CNBC:
Canopy CEO Bruce Linton shrugged off concern from investors that Canadian marijuana is overvalued, saying Canopy Growth is focused more on cannabis as a product than as a commodity.
In Canada, “by 2020 or 2021, there will be too much cannabis produced. If I’m still selling primarily an ingredient, I have completely dropped the ball. You want to transform it,” Linton told CNBC on June 28.
Two of the marijuana-based products Linton said he is the most optimistic about marketing to a broader audience are beverages and sleep aids.
This is the right strategy for this market. Supply is coming onto the market. Prices won’t stay high forever on the cannabis itself. Money will be made by the best brands with the best distribution networks. I think Canopy has the best shot at this today.
Canopy’s stock was as high as $56 recently, and today it’s trading at $36.02. The market cap is currently around $8.6 billion.
I think Canopy is a good buy around these levels, but it may fall further. These things tend to overshoot up and down. I’m going to cover Canopy more in the upcoming issue, but I wanted to let you know about this price drop and buying opportunity.
It’s a stock, so as always, it could drop further. It’s had a major run, but it’s also raised major cash to deploy and build a monster of a company.
That’s why we’re recommending the stock to you and adding it to the First Stage Investor portfolio.
Co-Founder, First Stage Investor