Canopy Growth (CGC 0.42%) quickly went from being a favorite cannabis stock for many investors to a favorite stock to bash. If there's any doubt about that, just look at the nearly 50% year-to-date increase in Canopy's short interest.
With Canopy Growth founder and longtime CEO Bruce Linton getting pushed out earlier this month, some investors are probably wondering if it's time to throw in the towel on the stock. But if you're in that category, here are three terrible reasons to sell Canopy Growth.
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1. Its share price has plunged in recent months
Sure, Canopy Growth's share price has plunged nearly 30% since the beginning of May. But selling because of this drop is one of the worst reasons you could possibly come up with.
For one thing, you'd nearly run out of fingers counting the number of times Canopy Growth's shares have fallen by at least 30% over the last five years. Yet the stock is still up around 1,280% during that period. Let's face it: Canopy Growth is a volatile stock. Despite that volatility, though, it's still been a huge winner for investors who hang onto their shares.
One of the biggest knocks against Canopy Growth has been its sky-high valuation. But the stock is now cheaper than it's been throughout much of 2019.
2. Its medical and recreational cannabis sales fell last quarter
Maybe you're more concerned about Canopy Growth's dismal fiscal 2019 fourth-quarter results. The company's sales in the Canadian adult-use recreational cannabis market fell from the previous quarter. Its medical cannabis sales in Canada fell. And its international medical cannabis sales slipped.
This might seem like a good reason to sell Canopy Growth stock. After all, any investor who bought shares almost certainly did so counting on the company delivering strong sales growth.
It's important, though, to dig into why Canopy Growth's Q4 sales declined from the previous quarter. Canadian provinces have opened retail outlets at a snail's pace. Supply constraints have hampered Canopy's ability to grow in international markets. Also, the company's transition of its Tweed brand to the recreational market contributed to lower medical cannabis sales.
But all of these should only be temporary issues. Canopy Growth's production capacity in its fiscal 2020 Q1 should more than double its capacity in the previous quarter. More retail stores are opening. Remember, too, that the second phase of the adult-use recreational market for derivative products including beverages, edibles, and vapes is set to open later this year.
3. It's not yet on a clear path to profitability
A company can't lose money indefinitely. In light of Canopy Growth's continued huge losses, you might be worried that it's not yet on a clear path to profitability. The company's new CFO Mike Lee recently confirmed that Canopy Growth won't be profitable in fiscal year 2020. Time to sell? Not so fast.
It's important to note that Canopy Growth's gross margin is expected to improve to 40% by the end of the fiscal year. Derivative products tend to be more profitable. As the market for these products picks up next year, Canopy's margins should improve significantly.
You can also count on Canopy Growth hiring a new CEO who focuses on setting a path to profitability. The company's big partner, Constellation Brands, wasn't happy with the big drag on its earnings caused by Canopy in the last quarter and will probably insist on getting a new person at the helm of Canopy who will focus on the bottom line.
What makes these reasons to sell so terrible
The big problem with all three of these reasons to sell Canopy Growth is that they're all short-sighted. They focus on the near term rather than the long term.
If you bought shares of Canopy Growth, you probably did so thinking that the global cannabis market would expand enormously over the next 10 years and that Canopy Growth is poised to be a leader in that growth. Nothing with the three terrible reasons to sell listed earlier change those premises in the slightest.
Let's look at things in reverse. Assume the premises are correct that the global cannabis market will explode and that Canopy Growth will be a market leader. If that happens, the company's sales will soar (addressing the No. 2 reason on the list) and it will almost automatically be on a path to profitability (addressing the No. 3 reason). And its shares would certainly skyrocket, taking care of the No. 1 terrible reason to sell mentioned earlier.
There are some legitimate reasons to sell Canopy Growth. For example, if you no longer believe the global cannabis market will grow as much as anticipated or that Canopy will be a leader in the market, sell the stock. Alternatively, if you think that there are better stocks to buy that will give you greater returns than Canopy Growth will, make a move. But whatever you do, make your investment decisions based on long-term thinking rather than short-term reactions.
