What happened

Volatility in the cannabis sector shouldn't be a surprise to investors, but one popular company experienced a significant move last month. Shares of Canadian marijuana company Canopy Growth (CGC 0.31%) dropped 19.6% in September, according to data from S&P Global Market Intelligence.

So what

The September move only added to the company's 2021 declines. Year to date, Canopy shares are down more than 45%. Last month's decline didn't stem from any company-specific news. In fact, in an investor presentation on Sept. 8, beverage giant and Canopy investor Constellation Brands highlighted that Canopy expects to achieve positive adjusted EBITDA during the first half of calendar year 2022. Both companies expect strong top-line annual revenue growth of between 40% and 50% over the next three years to fuel the path toward profitability. 

marijuana buds in jars at a dispensary.

Image source: Getty Images.

But a Canadian peer just reported shrinking revenue both sequentially and year over year in its fiscal quarter ended June 30. Aurora Cannabis reported its fiscal fourth-quarter results on Sept. 27, and it said total sales dropped 20% versus its year-ago period. 

Also in September, two separate analysts who cover Canopy Growth lowered price targets on the company. A Cantor Fitzgerald analyst dropped his 12-month price target to CA$21 from CA$30, saying he believes sales for the quarter just ended will come in below consensus forecasts.

Analyst Pablo Zuanic left his rating on the stock at neutral, as the stock is recently trading below his price target. He believes double-digit declines in the base cannabis business will cause the revenue shortfall, reports MarketWatch. Similarly, Piper Sandler analyst Michael Lavery lowered his price target, saying he expects sales to drop because of increasing competition in the Canadian recreational cannabis market. 

Now what

But Canopy investors should also be focused more on the long-term picture. That includes a path toward legalization and subsequent sales growth in the United States. The company is already launching new products in the U.S. market, including a cannabidiol (CBD) vape product announced in September. 

And the SAFE Banking Act took another step toward reality recently, when the U.S. House of Representatives included it in the broader National Defense Authorization Act, which passed on Sept. 23. The legislation would prohibit federal banking regulators from penalizing banking institutions from doing business with legitimate cannabis-related companies. While it isn't equivalent to federal cannabis legalization, it would allow financial institutions to serve the cannabis industry in states where it is legal. 

The SAFE Banking Act still has to get through the Senate, but having it on the table is marking progress. And investors in Canadian pot companies should be in it for the long haul. While there are some shorter-term concerns in the sector, volatility should be expected, and shareholders should keep their eyes on how progress in the U.S. market evolves.