With so many states so behind on their budgets due to the economic slowdown, the lure of increased tax revenue from legalizing Marijuana is starting to look even more tempting.
Some investors are starting to get excited about the prospects of the expansion of the Marijuana market in the United States next year, and given the recent economic circumstances, this is a wish that may indeed come true, to a degree at least.
More than half of the states in the country project a budget shortfall of over 10%, and 9 of them have actively discussed Marijuana legalization this year. The combination of need and open mindedness may serve to speed up the progress of tapping into this revenue source in several states next year.
For the moment, these things have been set aside while states grapple with both the ongoing pandemic and the economic devastation that it has caused them. With the election coming up in November, this will provide states that wish a good opportunity to conduct balloting on this issue as well, which could set the stage for legislation being passed and enacted in 2021.
Bobby Burleson, analyst at Canaccord Genuity, had been predicting late last year that 16 states were planning on putting the issue on the ballot this year, but a lot of that got swept aside when the virus overwhelmed our attention. As we become more and more aware of the economic damage in the wake of our response to it, the issue of money that was so completely set aside recently is starting to poke its angry head out more and more.
Burleson believes that this will help restore interest in these planned bills, as legislators come to grapple with the grimness of their budget shortfalls and perhaps even become more motivated to promote this issue.
We want to refrain from letting this returning optimism guide us too much on what to do with the Marijuana stocks that at least would seem to benefit from how their business may increase as more and more jurisdictions join the party. The problem is, you have to learn now to make money from this in the first place before you can scale up your profits with expanded markets.
This is not to say that there won’t be greater opportunity for the industry created by this, but the Marijuana industry is still in start-up phase where they are still trying to figure out how to be profitable and haven’t quite figured it out. When you are stuck with a net loss per dollar of product you sell, replicating this process in new markets just isn’t all that exciting.
There was a time when these stocks were going through the roof, brimming with hype, but as time went on and reality ended up overtaking fantasy, they simply fell from the sky. Investors may be willing to look the other way as far as their losing money goes for a time, time is not on the side of those who disappoint as much as these companies have.
Canopy Growth, the industry’s largest company and twice as big as their next competitor, first hit the market with an IPO in 2014. It opened at $2.44 a share, and a year later had fallen all the way to $1. The next 4 years saw the stock explode, reaching over $50 a share for a time. The ride down the mountain was just as steep, where by mid-March of this year, they fell all the way to $9. They have gained some of it back and now are over $17, but right behind them lies the better part of a very big mountain.
Analysts build in expectations of changes in market size, and while it’s not so easy to predict how this will play out over the next few years, they do offer their best guesses at least and therefore a good part of this is already accounted for in their forecasts.
Canopy Growth is not projected to turn a profit until 2023, three years from now, and only a slight profit that year at that. Their latest earnings call in March was a huge miss, losing $1.16 per share instead of the 30 cents that analysts were expecting, so it’s not unreasonable that they may be too optimistic about 2023 as well and this could take even longer than that.
A lot of people aren’t all that excited about a company in its losing phase, and we are reminded of how we were not enthused at all about Tesla prior to being profitable became close at hand. We like to see the light at the end of the tunnel, as many do, and told you that it’s best to wait until you can see it. It finally came, and this is when so many jumped on it and set this stock skyward.
Prior to that, this wasn’t a stock that suitable for investors, although traders love this kind of stock, ones that jump up and down like a pogo stick, as you can trade these trends both ways and make good money from something even though its price doesn’t change much over time.
The key to wanting to stay on a horse like this is to get on prior to its getting ready to run, and horses that are deep in mud of red ink just tend to not run very fast and may even fall. Canopy Growth has been a fabulous trade since mid-March, but this little trot doesn’t promise much more than that, and certainly does not indicate the sort of stability that people who want to ride it a lot longer look for.
This Just Isn’t Working Now and Might Not for a While
The biggest question mark about this stock is how investors will act during the lean times that this company is going to be going through. Investors don’t always have a problem with waiting on a stock for a long time if they see enough potential when they finally get to the promised land, but Canopy Growth’s future just does not look anywhere near that promising.
We already have seen the market vote against the initial hype that they had as recently as the summer of 2018, and while they had no shortage of excuses for their much slower than expected progress, things are becoming more and more difficult as new entrants enter the market. While profitability is usually a constraint upon competition, when you’re a losing company competing against other losing companies, going below the profitability line and losing money doesn’t serve as a deterrent because it’s already happening.
In this battleground, market share becomes more of a priority, and as you are fighting others on this, this battle can go on for quite a while until enough drop out from no longer being able to sustain this that things can more normalize.
The sheer number of competitors in the Marijuana/Cannabis business already is something that should concern investors and potential investors of this stock, as well as other Marijuana stocks, this array of competitors fighting over a market not all that big.
The way that this business has proceeded over the last few years is really a tale of two cities. There’s the one that had people thinking of cartels almost making more money than they could count from selling illegal Marijuana, and then seeing this being handed over to a few companies like Canopy Growth, as if investing in them should be like investing legally in a powerful drug ring.
The level of excitement that some investors had over these stocks not that long ago was incredible, with this relatively small industry pulling may more weight in the media than they should have. We have even done a few articles on this in a way that is disproportionate to its size perhaps, but not to its interest among the investing public.
The other city is the one that we ended up seeing them live in, which stands in very stark contrast. The dreams may have well exceeded what was reasonable to expect, but that itself stood in stark contrast to how this all played out in the business results of these companies.
The opening of the Canadian market was a watershed moment, and the dominant companies are all Canadian, including Canopy Growth. This is where things started to unravel for them, when fantasy met reality and took such a beating, when the suitcases of money didn’t arrive and the company and their investors had to instead pay a big initiation fee, which continues to be paid today and is expected to continue for quite some time.
There were problems right from the start, and while we were told this should resolve soon, when a lot of time has passed and things have only gotten worse, and isn’t expected to make it above the water for 3 more years, or even longer perhaps. The ugliness has become persistent.
The big illegal drug operations operate either under a monopoly or with very few competitors, and the standard practice is to seek to kill your competitors for real and not just in the marketplace. They also tend to be masters at running these businesses. You can’t compare this to a free market system full of companies that haven’t really shown that they know that much about what they are doing yet.
Canopy Growth Has Had a Nice Bounce, But Might Not Have Much Left
Canopy Growth was oversold like every stock was during the panic, and with Canopy Growth this was a panic upon a panic, the one that investors were in prior to this panic, and it was therefore very reasonable that this stock would put in a nice correction to this that saw them bounce pretty nicely already. Now that this has played out for the most part, we wonder how much more that they have in them before we reach the plateau of the expectations that the market has of them based upon the road forward.
Investing successfully in these stocks requires a higher level of skill than most investors possess, as those who bought it well above today’s price and still hold it have come to learn. At this stage, they are left to just put their hands together and hope to cut some losses, and while cutting these losses is a great idea, we need to wonder whether there may be a different stock that may give us a better opportunity to do that.
Given how little re-assessing investors do, and their penchant for using the past as a reference point, both of which are colossal mistakes, investors tend to cling to bad investments for far longer than they reasonably should. Your investment gone wrong may come back, but it may not, and needs to be viewed in terms of its suitability both in terms of net expectations and comparative ones.
If it’s more likely to lose than gain over a meaningful period of time, that in itself should serve to be exclusionary. Even with a positive expectation, this needs to be significant enough to compete well with other investments, and this is really where people mess up so much. We need to compare the potential for growth of Canopy Growth versus what other stocks we could be in right now, and this is where the idea fails so miserably, even if they can move up somewhat as the company waits to get their act together more.
Neither the stock nor the industry looks all that great now, new markets or not. They have to first show that they can make money from what they have to work with now before we can expect that scaling up will change this.
We have seen a huge increase in demand from the days where sales were limited to medical prescription to the much more widespread recreational sales they have now, and instead of things getting a lot better for them, they got worse, and this speaks more than anything to the caution we need to use when viewing their near term expectations of expansion.
Canopy Growth will therefore have to live up to their name more, both in terms of company and stock performance, before it even starts to catch up with competing stocks. The hype is dead, where so many saw such great promise, including Constellation Brands who bought a third of the company, and acquired most of their stock in the heady days of the fall of 2018, and have suffered huge losses with their position since.
Opening up the market more can only be a good thing, but this is just one of the pieces that we need to put this puzzle together, with the other being able to leverage this to make money. We’re still far away from seeing the second piece of this.
Now that Canopy Growth has to get by on real growth and not just dreams, they need to show us some first, and not falling behind year after year would be a good start. Until then, this stock is definitely tradable, but only if you really know what you are doing.