CGC Stock Surges, Does That Mean Pot Stocks Are on the Way Back Up?

Marijuana Stocks in 2020

The path forward for marijuana stocks has always been clear: fight for legalization around the world and, most importantly, in the United States.

But what has remained unclear through all this is the timeline, and just what obstacles pot stocks will face, with COVID-19 being a perfect example of an unexpected obstacle. To be fair, that applies to almost the entire stock market, not just marijuana stocks.

Now, however, we’re starting to see a recovery set in, with Canopy Growth Corp (NYSE:CGC) in particular surging after the company beat Wall Street expectations in its recent quarter.

The fact of the matter is that pot stocks have not had a good 2020. There’s no other way to put it. What’s important is to understand the reasons for that hiccup and to figure out what to do next. And that means using good news like the recent CGC stock surge to help us predict what the future holds for the overall marijuana industry.

So what happened to the marijuana market? It wasn’t simply that COVID-19 arrived; it was that COVID-19 came at the exact wrong time for pot stocks.

After marijuana was legalized in Canada in 2018, there was a lot of hype surrounding the industry. New pot stocks were hitting the market on major exchanges like the Nasdaq and the New York Stock Exchange.

We saw pot stocks like Tilray Inc (NASDAQ:TLRY) skyrocket by hundreds of points in a matter of days, only to see all those gains be given back over the next few years as the speculative bubble burst.

That’s just what happened: there was a bubble of speculation as marijuana stocks rose, with investors being distracted by the shiny promise of gains and not looking at the reality on the ground (e.g., marijuana shortages, various legal troubles as pot legalization expanded in the U.S., and the continued survival of the black market).

All that culminated in the marijuana industry falling short of its lofty expectations. It still grew rapidly, just not as rapidly as many analysts predicted (something I had warned about in the years leading up to legalization).

The end result was that marijuana stocks soared and then a correction set in, with a more realistic picture of the industry forming in the sobering aftershock of the pullback. That was the phase we were in. “Were” being the operative word, as COVID-19 had other plans.

You see, as weed stock prices normalized after the speculative bubble popped, pot stocks like Canopy Growth, with huge potential and a solid business foundation (including multi-billion-dollar deals with a big alcohol company), CGC stock and others similar to it were likely to see moderate gains for some time yet.

And, of course, the future of the industry depends on the legalization of the drug around the world, with the U.S. being the most sought-after market. Things were looking good in the U.S. as state after state legalized recreational or medicinal pot (or both).

The country even had its first crop of pro-legalization Democratic Party presidential candidates, but with the only anti-legalization candidate claiming the top spot in the nomination race (unfortunately for marijuana stock investors).

But anti-pot politicians are a dying breed. The days of the marijuana abolitionist firebrand politician is gone. Virtually every young or progressive politician on both sides of the political spectrum are for decriminalization, if not outright legalization, of cannabis.

And that lines up with the views of the American people; the majority of the country favors marijuana legalization, and has done so for years now. Politicians may be famously bad at their jobs, but even they can’t remain deaf to the wants of the people forever. After all, their jobs depend on it (supposedly).

All those positive factors have coalesced to form momentum for the marijuana industry. This momentum carried the industry forward and sparked gains across the board.

Share values were reassessed following the correction, allowing investors to enjoy strong gains until the day we see federal U.S. marijuana legalization (or legalization in another major country). That event would reignite a frenzy of investment in the industry, not unlike what happened when Canada legalized pot.

That, in turn, would create another speculative bubble, and so on and so forth. But at the end of the day, early investors would likely see exponential growth in their portfolios.

But all that was interrupted—and I deliberately chose the word “interrupted “instead of “stopped”—by the COVID-19 pandemic.

All the political momentum budding around marijuana was tossed aside as political forces the world over had to (rightfully so) focus on combating the deadly disease.

And what followed was almost a reverse of the speculative bubble. A sort of sky-is-falling attitude took hold of many investors and they pulled out of the market entirely, immediately fleeing from volatile stocks such as marijuana stocks.

This sent share prices down, as you’d expect, but as the market recovered and investors realized that the world was not, in fact, coming to an end, those prices bounced back quickly.

And this is all context for Canopy Growth’s latest quarterly report. The report came out amidst a market panic that really has yet to fully settle, with analysts and investors anticipating the worst. And that low opinion means marijuana investors who see the long game can plan ahead in order to net big gains in the coming months and years.

CGC stock’s recent success is important, then, not just for the company itself, but as a harbinger of things to come for the marijuana sector.

CGC Stock Growth

Chart courtesy of StockCharts.com

Canopy Growth stock climbed after the results of its first quarter of fiscal 2021 were released.

The company’s adjusted loss per share was $0.30, lower than the expected $0.35, while revenue hit $82.5 million, lower than the anticipated $84.2 million. (Source: “Canopy Growth Jumps 13% After Reporting a Smaller-Than-Expected Quarterly Loss (CGC),” Business Insider, August 10, 2020.)

While these may seem to be relatively moderate differences, it was enough of a win for CGC stock to see significant gains.

Furthermore, the company was able to dramatically reduce its losses compared to the same period a year ago, marking a net loss of $81.5 million, compared to $139.3 million in the first quarter of fiscal 2020.

Revenue similarly climbed about 22% higher than the same quarter a year ago, with the gains being attributed to the Canadian medical marijuana market and the international market, though revenue did fall somewhat short of Wall Street expectations.

“Following our previously announced restructuring actions, we have substantially reduced our expense and cash burn in this quarter in addition to reducing headcount by over 18% since beginning of this calendar year,” said Chief Financial Officer Mike Lee. (Source: “Canopy Growth Reports First Quarter Fiscal 2021 Financial Results,” Canopy Growth Inc, August 10, 2020.)

The results were in keeping with the scenario I described earlier, the damage to the marijuana industry being overblown at this point—at least among the top pot stocks.

As people come to their senses, things will eventually balance out. But until then, we can expect to see a number of top marijuana stocks continue to outperform expectations and see gains.

Analyst Take

It is a wild time to be an investor right now, with COVID-19 keeping things volatile. Still, we’ve seen speculation drive the marijuana market artificially high and fear drive the market artificially low. That means there’s a bit of predictability at play right now with pot stocks.

We’re likely gearing up for a long recovery for marijuana stocks, with moderate gains coming in fits and starts—and huge gains waiting for investors who can wade through the unpredictable times ahead of the near-certain federal U.S. marijuana legalization that’s on the horizon.