The steep drop in marijuana stocks in the past few days has investors wondering if this is the best time to start a new pot stock position or add to existing cannabis stock holdings.
Let’s take a look at Canopy Growth (TSX:WEED)(NYSE:CGC) to see if it deserves to be on your buy list right now.
Market leader
Canopy Growth is widely viewed as the stock to beat in the Canadian market and one of the top contenders to grab a significant share of emerging cannabis sales opportunities around the world.
The company is a leader in the medical marijuana market thanks to early and aggressive acquisitions when valuations were high, but not anywhere near the levels investors see today. The most important move on the medical marijuana side was arguably the takeover of Mettrum Health in early 2017. The deal bumped up Canopy Growth’s market share in the Canadian market to about 50% and added important production capacity as well as national brands.
In late 2017, Canopy Growth announced it had sold a 9.9% stake in the company to American beer, wine, and spirits giant Constellation Brands (NYSE:STZ). The move signaled that Canopy Growth was focused on a much larger cannabis opportunity in the Canadian market once the legal sales of recreational cannabis arrived. Adult pot smokers can now buy marijuana legally, and the sale of consumables, including cannabis-infused drinks, is expected to get approval next year.
Constellation Brands increased its ownership position to 38% in August, with a $5 billion bet on the emerging beverage opportunities. Some pundits speculate Constellation Brands will eventually take a majority stake in Canopy Growth.
In the meantime, Canopy Growth continues to expand its reach. The company recently announced a deal to buy Colorado-based hemp research firm Ebbu. Canopy Growth has also beefed up its presence in South America, with research operations in Chile and production facilities in Colombia.
Europe is another large market for the company. Canopy Growth was one of the first marijuana firms to establish a European operation with the purchase of a pharmaceutical distribution business in Germany.
Overall, the company appears to be making all the right moves in anticipation of strong Canadian demand for medical and recreational cannabis products. Overseas, Canopy Growth is positioning itself to capture important market share in medical marijuana opportunities, as governments adjust their cannabis regulations.
Buy or bail?
Canopy Growth currently trades for $50 per share, which is significantly below the 12-month high of about $76, but still well above the $13 investors paid at this time last year. The big bet by Constellation Brands has changed the game and likely serves as a strong support base for the stock, but additional near-term volatility should be expected and more downside could be on the way.
If you like the long-term opportunities in the Canadian and global cannabis markets, Canopy Growth should emerge as one of the winners, but I would keep any new bets small until there is clear evidence the recent rout has run its course.
Fool contributor Andrew Walker has no position in any stock mentioned.