Canopy Growth (CGC 2.41%) has often been seen as one of the safest cannabis producers to invest in. It has significant operations, considerable resources, and a big investment partner in Constellation Brands (NYSE: STZ), which poured billions into the company.
But a lot has changed over the years, and there's one significant reason I wouldn't invest in the company right now, even at its greatly reduced valuation.
The company's resources are dwindling
Canopy Growth's cash and liquid resources have been shrinking -- significantly -- as it has invested in other cannabis companies, focused on expansion into a U.S. market that's off-limits due to the federal ban on pot. As a result, its day-to-day operating activities have burned through a huge amount of cash.
Data source: YCharts.
Cash burn is nothing new for cannabis companies. But in the past, it appeared that the company had a bit of a safety net with Constellation Brands. The brewer, having invested billions into the cannabis producer, looked to be a partner that could add some safety to Canopy Growth's overall operations, especially since it's in a much better financial position.
Even that relationship, however, doesn't appear to be as strong anymore. And therein lies the big reason I would stay away from Canopy Growth's stock.
Constellation isn't going to save Canopy Growth
In a press release last year, Constellation Brands expressed support for Canopy Growth's plans to consolidate its U.S. assets into Canopy USA, a special purpose vehicle. At the same time, however, it also announced plans to transition its common-share ownership in the cannabis producer into exchangeable shares in order to "eliminate the impact to our equity in earnings," thereby mitigating risk to the company.
In short, the company wanted to lessen its exposure to Canopy Growth, whose losses weigh down Constellation's own bottom line. For the beer company, the move was also meant to "further reinforce our intent to not deploy additional investment in Canopy aligned with Constellation's previously stated capital allocation priorities."
So investors shouldn't expect a big influx of cash from Constellation Brands to save Canopy Growth if it continues to struggle and burn through money. The company might end up having to rely on debt or stock offerings to fund its business. And that's a big problem because Canopy Growth needs cash -- its financial position isn't showing any real improvement.
Data source: YCharts.
The company has been slashing costs and scaling back operations, into what it calls an "asset light" model, but that still hasn't been enough to make its business more sustainable. As a result, things could go from bad to worse for the business.
Investors should stay away from the stock
Shares of Canopy Growth are down 84% in the past year. And at this rate, there's no telling where the bottom will be for the stock, or if it will simply go to zero. The business faces big problems, and investors shouldn't expect that Constellation Brands will dump more money into it. Canopy has proved to be an awful investment not just for individual investors but for the beer company as well.
The U.S. doesn't appear to be legalizing marijuana nationally anytime soon. And the Canadian cannabis market also isn't improving and offering a compelling reason to be more bullish on Canopy Growth's near-term future. This is a business that's facing some powerful headwinds, and investors are better off simply avoiding the pot stock.
