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Here's Why Canopy Growth Jumped Higher on Friday

By Cory Renauer – Updated Nov 8, 2019 at 5:24PM

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Canada's largest cannabis company has formed a new subsidiary in partnership with Drake.

What happened

Shares of Canopy Growth (CGC -1.80%) popped after the company announced a new subsidiary owned by the licensed Canadian cannabis producer and the actor-musician Drake. Investors convinced better days are around the corner for Canopy Growth pushed the stock 11.8% higher as of 3:52 p.m. on Friday.

So what

That kid from Degrassi High, who shortened his name from Aubrey Drake Graham to just "Drake," is the latest celebrity to help Canopy promote a new line of products under a new brand. Drake bought 60% of the More Life Growth Company, which is already licensed to cultivate, process, and sell cannabis.

A cannabis leaf on top of the maple leaf on a Canadian flag

Image source: Getty Images.

Siphoning some money from Drake's personal fortune is a positive development for Canopy Growth, but investors should know that Canopy Growth has a terrible track record with celebrity endorsements. Drake joins Martha Stewart, Snoop Dogg, and Seth Rogen, all of whom have launched similar businesses in partnership with Canopy Growth, but none have generated a successful new product.

The first endorsement that fell apart was Snoop Dogg's Leafs by Snoop (LBS) brand back in 2016. Although the product is still available at the Ontario Cannabis Store, early reviews described dried-out, popcorn-sized buds just like those that are piling up in provincial supply chains across Canada. If the LBS brand is doing well in the U.S., somebody needs to tell Weedmaps, because a search doesn't reveal any retail locations.

Canopy's flagship Tweed brand sells some of the most poorly rated cannabis in Canada, but Seth Rogen's recently launched brand promised top quality. Unfortunately, the Houseplant brand disappointed Canadians who paid handsomely for more of the same harsh-tasting, tiny buds that consumers have come to expect from Tweed.

In February Martha Stewart provided advice related to launching successful animal-health products, but how to make those happen quickly was clearly not part of the discussion. Canopy Growth is still developing animal-health products with no mention of when they might reach the public.

Now what

Rapid expansion in Canada and abroad has left Canopy Growth with a lot of employees who don't have much work to do. The company spent 107.4 million Canadian dollars on sales, general, and administrative expenses during the quarter that ended June 30, in order to net revenue that reached just CA$90.5 million.

Canopy Growth still has a war chest stuffed with CA$3.1 billion, thanks to a giant investment made by Constellation Brands (STZ -1.71%) earlier this year. This means Canopy still has plenty of time to learn how to sell marijuana at a profit.

Constellation Brands and Canopy Growth will probably be able to launch their first cannabis-infused beverage early next year, which might help Canopy make ends meet. The minuscule concentrations of CBD (cannabidiol) and THC (tetrahydrocannabinol) that Health Canada is willing to allow, though, probably won't drive significant sales.

Cory Renauer 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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