For years, Canopy Growth (CGC +0.48%) was seen as a top marijuana stock to own. It was a leading company based in Canada that was focused on growth and rapid expansion throughout the country, and eyeing opportunities in the U.S.
Unfortunately, things haven't panned out as the company had hoped. As a result, it's not only been doing badly, it could easily be one of the worst stocks you could have owned during the past five years. In that stretch, it has lost more than 99% of its value.
Today, with a market cap of $500 million, the stock has gotten more attention of late due to news of the U.S. rescheduling marijuana to a less dangerous category. Could this be what helps turn Canopy Growth's fortunes around?
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What does marijuana rescheduling really mean for investors?
Last month, U.S. President Donald Trump signed an executive order to reschedule marijuana from a Schedule I substance to Schedule III. What this means is that per the Drug Enforcement Administration's drug scheduling, marijuana will no longer be classified in the same category as heroin and LSD.
The big win for the marijuana industry is that it will make it easier to research the substance. For multi-state operators, it will lead to lower tax bills, as section 280E of the tax code will no longer apply. This section prevents marijuana companies from deducting basic business expenses.
For Canopy Growth, as you may have realized, this doesn't mean a whole lot. While many investors see rescheduling as a positive first step toward marijuana legalization, by no means is that a sure thing, and there's no reason to expect that it will happen anytime soon. But as with any positive marijuana-related news, stocks in the industry often all rise and fall together. Canopy Growth did get a brief boost on the developments last month, only to end up falling back down.
Canopy Growth is still a highly risky business to invest in
In recent years, Canopy Growth has been shrinking, rather than expanding. It has been working on trimming its costs and limiting its cash burn. Unfortunately, those are still problems plaguing the business today.
In the company's most recent quarter ended Sept. 30, Canopy Growth incurred an operating loss totaling $16.9 million Canadian dollars ($12.2 million). That's a sizable improvement from a year ago, when its operating loss was CA$45.9 million (largely due to much smaller impairment and restructuring expenses). Its cash burn rate has also slowed significantly. During the past six months, the company used up CA$28.3 million over the course of its day-to-day operating activities, versus CA$105.6 million in the same period a year ago.
Canopy Growth is making progress, but whether it's really moving in the right direction is debatable. This past quarter, its revenue came in at just under CA$83 million. Three years ago, its top line totaled nearly CA$118 million for the same period. That's a decline of 30%. With the business getting smaller and marijuana rescheduling not likely to be any kind of catalyst for the company, it's hard to make a case for Canopy Growth being a good growth stock to own.
NASDAQ: CGC
Key Data Points
This is a stock I'd avoid at all costs
Canopy Growth may be making progress in terms of reducing its losses and slowing cash burn, but that's arguably not as difficult to do when the business is getting smaller in the process. The more challenging goal is to do that while also growing.
The company has banked its hopes heavily on the prospects for marijuana legalization in the U.S., and it's paid a steep price in recent years for doing so. Buying a stock based on the expectation that the government will enact significant reform is incredibly risky, and that's what long-term Canopy Growth investors have learned over the years.
Given its persistent losses, shrinking size, and the many question marks still ahead for the business and the industry, this is a stock that I don't think is worth taking a chance on, even despite its drastically smaller valuation.
