<p>Even after the price was halved by the coronavirus reaction, the shares in Canopy Growth (NYSE: CGC) would still open on March 19, about 12.3 times last year’s annual revenue of $ 368 million. Put another way: it’s still too expensive.
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Tension over marijuana legalization sent Canopy stockpiling on a fantastic trip last year. It traded as high as $ 50 per share in April last year.
But when it realized that illegal weeds were a better value, Canopy’s price fell. Now, with a lung disease destroying its customer base, the bottom is falling.
Constellation Brands (NYSE: STZ), the spirits company that invested $ 4 billion in pot cultivation back in 2018, has seen the value of that investment shrink like a grape in the sun.
The question now is whether Canopy, or Constellation, has the financial support to not only get past the crisis but to change the government’s attitudes to the pot.
The problem with Canopy is a legal requirement. Governments that have legalized marijuana see it as a tax return and a way to deliver equity to poor people who have been ravaged by bans.
All good, but the result has been pricing that is twice as much as illegal marijuana or pot-based products can cost. Delays in opening stores also mean that illegal weeds are more widely available than legal cannabis, as the retailer McDope delivers.
Instead of the reverse course when this became apparent, and hoarding cash, Canopy expanded to “Cannabis 2.0”, a range of beverages, foods and CBD oil that proved to be as catastrophic as the pot itself. The drinks and food were just like the raw material, too expensive. CBD oil was a fad that could not prove a therapeutic benefit.
Throughout this, I have been knocking on the table at Canopy and asking readers to avoid it. For a long time, Constellation’s size protected Canopy from the worst of the sector’s problems. With the spread of Coronavirus slowing down the producer of Corona beer, Constellation is reduced by 38% compared to the previous year. Canopy decreases by 53%.
Constellation is no longer able to support anyone. It ended November with just $ 93.7 million in cash. It also had $ 11.3 billion in debt. Its agreement to sell cheap brands to Gallo had to be halved to satisfy regulators. Even if it closes on the current terms, it will not reduce the debt much. A bumper harvest in California and a change in taste among younger drinkers, means that the prices of even good wine are falling.
As a result, Canopy Growth has been forced to close greenhouses and lay off hundreds of workers. Plans to expand production to eastern Canada have been shelved.
Thanks to Constellation’s investment, Canopy is now healthier than the two partners, with $ 2.3 billion in cash and short-term investments at the end of 2019. The right step for Constellation could then be to buy the rest of Canopy and use it for cash. But it can not do so at current prices without significant dilution of equity.
The conclusion on CGC stocks
The marijuana height 2018, for investors, has become 2020’s bummer. CGC shares are the poster child for telling investors to “just say ‘no’.”
Constellation may come out during some of its current problems by waiting for Canopy to fall further and then devouring it at a bargain price. A few more weeks of panic would make it possible.
Still, Canopy is still the healthiest of the pot. It is likely to survive in some form. You may also want to look at the Constellation bottom and then scoop up some of it. As bad as things are now, people want to drink when all this is over … and smoke too.
Dana Blankenhorn has been a finance and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him on email@example.com or follow him on Twitter at @danablankenhorn. At the time of writing, he did not own any of the shares in the companies mentioned in this article.