Canopy Growth Corporation (OTCPK:TWMJF), formerly Tweed Marijuana Inc., is a diversified cannabis company. The company is in the business of producing and distributing marijuana in both the recreational and the Canadian medical market through its subsidiaries. Its two core brands are Tweed and Bedrocan. Tweed focuses on production of marijuana with commercial licenses that cover approximately 168,000 square feet of its Smith Falls facility and produces over 3,450 kilograms of medical marijuana per year. Bedrocan has over 52,000 square feet production facility in Toronto and included over 30 growing rooms and three dispensing rooms.
Canopy Growth Corp. had a great performance during 2016, but investors should be cautious taking long positions in the stock. Even during a record setting year for the Dow Jones (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY), the stock has outperformed the market immensely. Due to steady revenue growth in 2016, volatility in 2017 has begun to calm down, but value investors should look elsewhere as this is purely a speculative play.
The company has potential to rise to new heights, but I believe that the stock will correct by over 50% in the near future. It is evident that any small piece of negative news will leave the stock in the dumps because there are thousands of short-term investors in the stock at these levels. Currently, stock prices are at 12.40 CAD which is ridiculously expensive and it will take one piece of negative news for the dominoes to start falling. The days of easy gains are long gone, and the price of the stock will fall back to reality. Marijuana investors have been overly positive on Canopy Growth and that is currently being priced in. Even with the off chance of more news of marijuana legalization, we don't believe Canopy will see the rally it did in previous years.
Clearly the stock is only an option for speculative traders as it is too dangerous considering that most of the shareholders are short term investors who will rapidly sell-off if the stock experiences a few days of losses. Additionally, as can be seen in the past two months, when no news comes out, investors slowly sell their positions, steadily bringing the stock price down.
We understand that it is unreasonable to value the stock using traditional fundamental valuation metrics, and there is no margin of safety at current levels. For a true value investor, there is no explanation for buying in to this stocks at the ridiculous multiples it is currently trading at.
For those that are bullish on the marijuana industry we advise to wait for the correction before buying the stock. With the short-term retail investors out of the picture, value investors can feel safe to take long term positions in the stock. We recommend to buy the stock in increments to reduce exposure risk and provide opportunities to buy on the dips and reduce the average cost basis.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The analysis in this article is the opinion of the author and does not constitute investment advice.