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Why Marijuana Stock Canopy Growth Soared 74% in August

By Beth McKenna – Updated Sep 4, 2018 at 7:48AM

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This marijuana stock has been on fire over the last year. Here's what investors should know.

What happened

Shares of Canopy Growth Corp. (CGC) rocketed 73.8% in August, according to data from S&P Global Market Intelligence. This brings the marijuana stock's year-to-date 2018 return to 93.3% and one-year return to a whopping 537% through Friday, Aug. 31.

For some context, the S&P 500 returned 3.3% last month, and has returned 9.9% so far in 2018 and 19.7% over the last year. 

Arrow pointing upward at about a 45 degree angle on blue graph background.

Image source: Getty Images.

So what

We can attribute Canopy Growth stock's powerful August performance primarily to two huge catalysts. First, news came out that recreational marijuana will become legal for adults in Canada and go on sale in licensed dispensaries on Oct. 17. This naturally opens up a massive market for companies involved in the pot industry, so the share prices of nearly all publicly traded Canadian marijuana companies rose significantly last month.

Second, alcoholic beverage giant Constellation Brands (STZ 2.01%), which makes such well-known beers as Corona and Modelo, announced in the middle of last month that it was making a $3.8 billion equity investment into Canopy, as fellow Fool Sean Williams wrote. This will be Constellation's third investment in Canopy and will bring its ownership stake to 38%, which could jump to more than 50% in three years if Constellation exercises all of the warrants it will receive.

There can be little doubt that Canopy and Constellation are working on developing a line of cannabis-infused beverages. Such beverages are widely expected to become legal in Canada next year.

Now what

Both catalysts discussed above certainly add significant revenue growth potential for Canopy, which is currently focused on the medical marijuana space. That said, the company is sure to face stiff competition in the new Canadian recreational pot market and the cannabis-infused beverage market.

The marijuana stock space is extremely volatile, with players sporting nosebleed valuations -- Canopy is trading at 151 times its trailing-12-month revenue -- so there's phenomenal growth already baked into their share prices. These stocks are suited only for investors with a high tolerance for risk.

Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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