Shares of pot producer Canopy Growth (CGC 2.41%) jumped more than 17% last week, rising to as much as $9.61 at one point -- the highest level it has been at since the first day of trading in 2022. Such significant price movements aren't all that uncommon in a volatile sector like cannabis.
However, with the company reporting earnings last week, investors may be wondering if that recent jump had more to do with a strong quarterly performance and the start of a potential turnaround for the struggling business. Let's take a closer look at how the company did last quarter, if that was the likely catalyst behind the stock's jump, and whether it's a buy today.
Was a strong earnings report behind the spike in share price?
The key numbers investors often focus on in earnings reports are sales and profits. That's especially true in the Canadian cannabis sector, where profitability is rare and even sales growth has become a challenge.
When Canopy Growth reported earnings, it was really a mixed bag of results, although I'd argue there was more bad than there was good. Although sales of 141 million Canadian dollars for the period ending Dec. 31, 2021, were a 7% improvement from the previous period, when looking at the prior-year period, the numbers weren't nearly as impressive. A year ago, the company reported revenue of CA$152.5 million, meaning that this past quarter they were 8% lower.
In terms of profitability, Canopy Growth made only modest improvements from a year ago, with an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss of CA$67.4 million, which was largely unchanged from the CA$68.4 million loss the business incurred a year earlier. And while the company did bring down its selling, general, and administrative expenses by 19%, the problem is that price compressions and declining gross margin offset much of those gains.
For every positive, there seemed to be a corresponding negative to offset Canopy Growth's numbers in the third quarter. And that's where it's hard to see much excitement in the business, especially to the point that it would jump 17 percentage points in a single week.
Image source: Getty Images.
If not earnings, what was the likely catalyst behind the big move last week?
Cannabis stocks, in general, were up last week, not just Canopy Growth, although it did have a larger increase than the Horizons Marijuana Life Sciences ETF. The reason likely stems from Senate Majority Leader Chuck Schumer's bill for reforming marijuana making its way back into the mainstream. Last week, news spread that he, along with Sen. Cory Booker and Finance Committee Chairman Ron Wyden, were looking to finalize the legislation and were seeking input on the bill from their colleagues.
I'm not optimistic that anything will happen with this bill. Even something modest like the SAFE Banking Act can't find a way to pass into law, and it doesn't call for significant reform in the cannabis sector; it simply aims to make it easier for the big banks to do business with the cannabis sector. Hoping for more significant reform may be a pipe dream right now under a U.S. president who really hasn't shown any interest in making such sweeping changes, such as legalizing marijuana outright.
Nonetheless, anytime news of marijuana legalization makes headlines, pot stocks soar. You may be wondering, why wouldn't every pot stock be up by 17% then? What makes Canopy Growth so special? The simple reason is Canopy Growth has been much more aggressive than its peers in Canada in securing deals in the U.S. that it can execute on once legalization happens (e.g., it has a pending transaction with multi-state operator Acreage Holdings and a deal with edibles maker Wana Brands). Canopy Growth has a lot to gain from legalization, possibly more than any other Canadian pot stock. And so it would make sense that it would also jump the most on any news relating to legalization.
None of this news makes Canopy Growth any better of a buy than it was a week earlier
What happened last week should not have changed your mind about Canopy Growth. The company's earnings numbers remain uninspiring and legalization, despite all the talk and optimism about it, likely isn't imminent. If you're OK with holding this stock for years and going on what could be a volatile roller-coaster ride until legalization in the U.S. takes place, then Canopy Growth could end up being a good investment.
But if you're expecting some quick gains and hoping that what happened last week will somehow lead to strong returns this year, you will likely be disappointed.
