Over the past year sky high expectations for cannabis companies led to valuations getting ahead of themselves, and price crashes quickly following. All of the major Canadian cannabis producers are now over 50% off their all-time highs.
The main issue plaguing cannabis companies has been liquidity. The limited access to cash resulted in dozens of companies running out of options. To be candid, many market participants practiced capital expenditure plans under the assumption Canadian Cannabis would roll out with little headache. That was wishful thinking and has not been the case.
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Slower than expected retail openings, product limitations and irrational optimism fostered dozens of companies waiving the white flag and declaring bankruptcy.
Most Important Consideration
Choosing the company with the strongest balance sheet is the key to making sure your Cannabis exposure survives while the industry develops. Canopy Growth Company (CGC -7.32%) is the most conservative way to add cannabis stock exposure.
Beer maker Constellation Brands paid 4 billion dollars in 2018 to purchase a 38% stake in the cannabis producer. Beyond the extensive consumer packaged goods experience this company brings to canopy, it gives unmatched liquidity.
Enviable Position
In a world where cash is king, liquidity means flexibility, and along those lines I believe Canopy is the only producer capable of purchasing struggling competition in the industry. The company features a 3.4-billion-dollar cash position miles ahead of competition. Synergies, and scale created from acquisitions would deepen Canopy’s competitive moat further while competition struggles to stay alive.
Since the investment, sentiment turned aggressively bearish for cannabis producers, making some extrapolate constellation’s regret in the investment. Not so fast. This month Constellation exercised share warrants to raise their stake in the company, depicting confidence in Canopy’s long-term success; there are reasons to be hopeful.
Improving Landscape
With Canada ruling cannabis sales as essential, store openings continued. Ontario’s total stores grew from 40 to 60 this month with hundreds more planned expanding access for consumers to regulated product.
Canada’s government has every incentive to push cannabis sales to legal markets for collecting tax revenue. More stores is how to do so. With no shops early on, the black market continued to yield billions more in total sales than Canada’s legal market.
Beyond new stores, Canopy is on the verge of releasing their cannabinoid beverage product line. On the most recent earnings call CEO David Klein was reserved on hints pertaining to the new beverages. All he would say about the drinks is they will be a “game changer”. A straight-shooting Klein seemed elated at the prospect of cannabis drinks.
Management With Experience
Speaking of David Kline, the Canopy management team rounds out my confidence they can use a strong cash position to dominate the market. Past executives are out, and they’ve been replaced by constellation brands veterans to help guide the company. It’s plausible to think the extensive success, experience and insight constellation enjoys on the consumer-packaged goods will help aid Canopy’s success too.
A global rollout of legal cannabis will take a long time to be realized. Canopy Growth has the assets, management, and cash in place to endure inevitable bumps in the road as this industry matures. While other stocks with higher leverage, or stock-pumping CEOs may be tempting keep it simple and go with Canopy.
