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Marijuana Producer

This major producer of medical marijuana continues to expand its operations following the legalization of recreational cannabis.

While its market share already places it among the biggest producers, a key deal with a large investor will likely ensure it gains the same dominant position for the coming “edibles” market. The company is also set to gain a legal foothold in the U.S. with a licence to grow a marijuana-related plant with medicinal potential.

CANOPY GROWTH CORP., $67.14, symbol WEED on Toronto (Shares outstanding: 343.6 million; Market cap: $22.0 billion; TSI Cannabis Quality Rating (CQR):  ; www.canopygrowth.com), began trading on TSX Venture Exchange under the name Tweed Marijuana on April 3, 2014. The shares graduated to the regular TSX Exchange on July 26, 2016.

On May 24, 2018, the company became the first cannabis producer to be listed on the New York Stock Exchange (symbol CGC).

The stock is up 67.9% since early January 2019. That’s in part due to news that Canopy has been granted a licence by New York state to process and produce hemp, a member of the cannabis plant family. The company now plans to invest between $100 million U.S. and $150 million U.S. at its proposed New York hemp operations.

Growing hemp is now legal after the passage, also in early January, of the U.S. 2018 Farm Bill. This designates hemp as an agricultural product, making it a potential source of legal cannabidiol, or CBD, a non-psychoactive compound also found in marijuana. Cannabis products with higher levels of tetrahydrocannabinol, or THC, remain listed as restricted drugs by the U.S. federal government.

Hemp is a plant in the cannabis family with very low THC content. THC, or delta-9 tetrahydrocannabinol, is responsible for providing marijuana users with a pot-associated high. CBDs, on the other hand, are other cannabis compounds, known as cannabinoids. Researchers have been looking at the possible therapeutic uses of CBD. Processed into an oil, CBD comes in varying concentrations.

Unlike THC, which breaks down when heat is applied and it’s introduced into the body, CBD is not psychoactive. This means it does not change a person’s state of mind when they use it. However, CBD does appear to produce significant changes in the body, and some research suggests that it has medical benefits.

Canopy is a licensed grower for Canada’s medical and recreational cannabis markets. It has 10 facilities with total capacity of more than 4.3 million square feet of licensed production space. The company shipped its first product on May 5, 2014, from its Smiths Falls, Ontario, plant. It also operates Tweed retail stores in Newfoundland and Manitoba and has entered into supply agreements with every Canadian province and territory.

All in all, the company has operations in over a dozen countries across five continents.

Canopy agreed on November 2, 2017, to sell 9.9% of its shares to Constellation Brands (symbol STZ on New York), one of the world’s largest beer, wine and spirits producers. The two companies plan to work jointly on cannabis-infused drinks.

The partners aim to initially sell those drinks in Canada given expectations Ottawa will legalize edible and drinkable cannabis products as early as 2019. They will not sell those edibles (or cannabis itself) in the U.S. until the U.S. federal government changes its marijuana laws.

Canopy and Constellation subsequently expanded their strategic relationship. On August 15, 2018, Constellation agreed to buy an additional 104.5 million Canopy shares at $48.60 a share, for a total of $5.1 billion. As a result, Constellation now owns roughly 38% of Canopy. It has also placed four directors on Canopy’s seven-member board.

As well, Constellation received warrants to purchase additional Canopy shares over the next three years. If it exercises those warrants (worth $4.5 billion in total), it will own over 50% of the cannabis company.

Canopy’s revenue in the three months ended September 30, 2018, rose 32.8%, to $23.3 million from $17.6 million a year earlier. The company lost $330.6 million, or $1.52 a share, in the latest quarter, compared to a loss of $1.6 million, or $0.01. The big loss was due to estimated losses on the value of Canopy’s inventory of cannabis, as well as accounting adjustments in the value of its convertible debt. Either way, on operating basis, it lost money in both periods.

Canopy ended the quarter with cash of $429.4 million, or roughly $1.25 a share. Its total debt is high at $910.2 million–although it’s low 4% of its market cap.

The stock is widely followed by momentum traders. That in part explains why it jumped on the news of the New York state hemp licence. However, Canopy’s $22.0 billion market cap is extremely high in relation to its sales of just $23.3 million in the latest quarter. Canopy will need to see huge revenue growth to even justify its current stock price—let alone move higher.

Canopy Growth has a 3½-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.