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Why Canopy Growth Jumped Today

By Keith Speights – Updated Apr 15, 2019 at 11:55PM

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Coverage initiation from a leading investment firm stirred investors' enthusiasm for the Canadian marijuana stock.

What happened

Shares of Canopy Growth Corporation (CGC) jumped 12.9% higher as of 3:12 p.m. EST on Wednesday. The Canadian marijuana stock received a boost from Piper Jaffray initiating coverage with a one-year price target of $40, a 33% premium over Canopy's closing price on Tuesday.

So what

Analysts' initiation of coverage and one-year price targets should be taken with a grain of salt. However, the underlying reasons for Piper Jaffray's optimism about Canopy Growth deserve consideration.

Shadow of a dollar symbol on pile of marijuana leaves

Image source: Getty Images.

Piper Jaffray analyst Michael Lavery wrote to clients that "the long-term growth opportunities are significant" for the cannabis industry. He estimated that the current addressable market, including Canada, Europe, and the U.S., could be up to $50 billion. Over the longer term, Lavery wrote that the global cannabis market could be between $250 billion and $500 billion.

Lavery suggested that marijuana legalization could become a hot topic in the 2020 U.S. presidential election if changes to current federal laws don't happen before then. Because legalization of marijuana is popular in the U.S., he speculated that both Democrats and Republicans could support legalization efforts.

Assuming this optimistic perspective is on target, Canopy Growth would likely be a big winner. The company ranks as the largest marijuana producer by market cap. It also has plenty of cash to expand internationally, thanks to its partnership with alcoholic beverage maker Constellation Brands.

Now what

While the future could be exciting for Canopy Growth, there's a lot of work to be done. The company plans to boost its supply of cannabis to help meet tremendous demand in the Canadian recreational marijuana market. It also eagerly awaits the finalization of Canada's regulations for cannabis edibles and concentrates. Canopy and Constellation have announced plans to launch a lineup of cannabis-infused beverages.

Canopy also continues to be active on the global front. Perhaps the biggest opportunity stems from U.S. legalization of hemp, which by definition is cannabis that contains very low levels of the psychoactive compound THC. Although there isn't a pathway right now for hemp grown in Canada to be used in hemp-based cannabidiol (CBD) products, Canopy still sees a tremendous opportunity to expand into the U.S.

It's likely that Canopy Growth stock could be volatile over the coming months. But the optimism expressed by Piper Jaffray appears to be warranted.

Check out the latest Canopy Growth earnings call transcript.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

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