For years, investors have viewed Canopy Growth (CGC -23.12%) as a leader in the cannabis industry. The Canadian-based marijuana producer has been aggressive in acquisitions and its attempts in trying to expand into the U.S. market. Unfortunately, in recent years, the company has struggled to generate growth, and with the U.S. still unlikely to legalize marijuana in the near future, investors have lost hope in Canopy Growth.
The stock has crashed and, unfortunately, investors shouldn't expect things to improve anytime soon.
Canopy Growth no longer part of the S&P/TSX
Earlier this month, the S&P Dow Jones Indices announced it will remove the cannabis company from the S&P/TSX Composite Index prior to June 19. The index is made up of the top stocks on the Toronto Stock Exchange (TSX), representing about 70% of the exchange's market cap.
The primary criteria for inclusion on the index relate to market cap, price, and liquidity. Canopy Growth's declining valuation and share price are key reasons why the stock has likely become ineligible for the index.
Losing its place in the index is significant, because exchange-traded funds and many mutual funds track it. If Canopy Growth stock is no longer part of an index, then it will get dropped from those funds and fewer investors will have exposure to it.
Why has the company struggled so much?
Over the past few years, Canopy Growth's sales have been falling substantially as it has no longer been benefiting from new markets opening up. And there has also been lots of competition in Canada, making growth difficult for the business as it has no market advantage (e.g., it can't advertise plus limitations on packaging result in no benefit from brand recognition). Expenses, however, have continued to climb, and there has not been any big improvement in Canopy Growth's bottom line, either.
CGC Revenue (Quarterly YoY Growth) data by YCharts.
At a market cap of now less than $400 million, Canopy Growth's valuation has fallen by a whopping 96% in just the past three years. The one saving grace might be that with the company at a price-to-sales multiple of less than 1, cannabis investors at least aren't paying a premium for its stock anymore. That alone, however, may not be enough of a reason to encourage investors to take a chance on this struggling business.
Investors should avoid Canopy Growth stock
The only catalyst I can see reviving excitement in Canopy Growth's stock is some reasonable expectation of legalization taking place in the U.S. pot market. That would give investors hope that the company might soon be able to expand in the U.S. and take advantage of its partnerships and investments in Wana Brands, Jetty Extracts, Acreage Holdings, and other U.S.-based cannabis businesses.
But that could still be years away from becoming a reality. In the meantime, Canopy Growth may incur significant losses and see its revenue continue to decline, leading to a potentially even lower share price and valuation. Unless you have an extremely high risk tolerance, you're better off avoiding this stock as its decline could continue for the foreseeable future.
