Canopy Growth Is Worth Owning Despite Congress Dithering
Canopy Growth (NASDAQ:CGC) and CGC stock lost ground in recent days due to the realization by investors that the new cannabis legalization bill being put forward by Senate Majority Leader Chuck Schumer has got a long way to go before it goes to a vote.
When it does, it’s doomed to fail. And, even if it miraculously passes, the states still have a say whether cannabis is legal in their specific jurisdictions.
It’s at times like this where I’m glad to be Canadian. It seems so silly in 2021 to be worrying about recreational cannabis when guns are sold like Pez dispensers, but since I don’t have a dog in this fight, I’ll get back to the subject at hand.
Sure, the pace at which the U.S. federal government is pursuing legalization has got to be frustrating to Canopy shareholders. Still, the reality is that federal legalization will happen because it’s fiscally irresponsible not to do so.
In June, an opinion piece appeared in USA Today that pointed out that the state of New Jersey spends $143 million a year enforcing cannabis prohibition even though the voters voted to legalize cannabis on Nov. 3, 2020.
How dumb is that?
Nationwide, the country spends $47 billion in the fight against drugs. But, unfortunately, that doesn’t seem like money well spent when you consider drug overdose deaths in 2020 hit their highest level since at least 1999.
The Feds are playing a losing hand, and they know it.
If you own CGC stock, federal legalization will come to pass. Just maybe not this year or even next year.
In the meantime, Canopy still has a lot of irons in the fire.
CGC Stock and Canadian Market
On June 23, Canopy completed its acquisition of Supreme Cannabis for approximately $180 million in stock and a small amount of cash.
“Through the addition of Supreme, we’re strengthening our leadership position by offering Canadian consumers a differentiated brand portfolio – including the addition of 7ACRES, which further bolsters our premium product segment,” Canopy Chief Executive Officer David Klein said in its press release.
The acquisition of Supreme gives Canopy an 18.1% market share of the Canadian recreational cannabis market. That’s nothing to sneeze at.
Earlier in June, Canopy reported its fourth-quarter and fiscal 2021 results. The company grew its revenues by 37% over last year to 546.6 million CAD ($434.1 million). In addition, thanks to implementing cost-saving initiatives, Canopy expects to cut up to 200 million CAD ($158.8 million) out of its annual expenses within the next 18 months. As such, it plans to be profitable in fiscal 2022.
Across its various segments, business is good. In Q4 2021, it captured more than 19% Canadian market share of recreational flower sales. In vapes, it’s number three overall and first in all-in-one vapes. Its THC beverages have a 35% market share by revenue, and its Tweed Strawberry gummies roll out in Q1 2022.
Canada remains the foundation upon which an empire is built.
South of the Border
Investors tend to focus on the pending Acreage Holdings (OTCMKTS:ACRHF) acquisition because it gets the company into 13 states, 33 dispensaries, and 18 cultivation and processing licenses in the U.S. market. But, of course, it’s meaningless if the Feds don’t legalize.
In the meantime, it’s got plenty on its plate to keep itself busy.
It launched Martha Stewart’s line of health and wellness CBD (cannabidiol) products across the country in 2021. In April, data suggested that the brand was already a top 9 brand in the CBD supplement category.
In Q4 2021, Canopy launched its Quatreau CBD beverages, partnering with Southern Glazer’s Wine & Spirit, one of the country’s largest alcoholic beverage distributors. Its owners own the Tampa Bay Buccaneers.
Lastly, BioSteel’s ready-to-drink (RTD) sports beverages are a top-7 sports drink brand in the U.S.
It might not be as much activity as some would like, but it’s enough to keep the needle moving forward.
The Bottom Line
One of the most positive aspects of Canopy’s Q4 2021 report was the revelation that it has gotten its Canadian production footprint under control. No longer is it overproducing cannabis. In the fourth quarter, the equivalent kilograms sold was 40% higher than the kilograms harvested.
That alone will save it a bunch of money down the road.
The company finished its latest fiscal year with 727 million CAD ($577.4 million) in net cash, rising revenues across virtually all of its business segments, and profitability on the horizon.
From where I sit, the glass is half full, not half empty. CGC stock remains the cream of Canadian cannabis stocks.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
