Canopy Growth Corp. is the best cannabis stock in a weak field: Brian Madden

The build up to recreational marijuana in Canada has been a sight to behold, but chances are that more than a few dreams will get shattered before it’s all said and done, says Brian Madden of Goodreid Investment Counsel, who sees a much sparser landscape in cannabis’ future, although industry leader Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart TSX:WEED, NYSE:CGC) is likely to be a survivor.

“Much like the early days of the Internet, there are going to be dozens if not hundreds of ‘me too’ stories that want to cash in on the halo effect that some of these leaders have,” says Madden, senior vice president and portfolio manager at Goodreid, to BNN Bloomberg . “Most of them are going to go to zero. I don’t think Canopy Growth is one of them.”

Want proof of Canopy’s leadership role in the space? Look no further than the deal it signed last month with beer and alcohol company Constellation Brands, a $5 billion investment that ups its stake in Canopy to 39 per cent. Once news of the deal broke, the cannabis sector as a whole took off, with companies recording double-digit gains in share value overnight. For Canopy’s part, although the stock has traded lower over the past week its share price is still up over 75 per cent since the August 15 announcement.

Canopy Growth Corp stock valuation. Too high or too low?

“[Canopy Growth] is cashed up nicely and it will survive as it’s got a well-funded backer in Constellation Brands,” says Madden. “But I’m not sure that the growth is going to live up to the hype and the heightened expectation sufficiently enough to justify the stock price.”

“In our view, until proven otherwise, marijuana producers are undifferentiated, unbranded producers of a commodity not dissimilar to wheat or corn or soybeans [which] earn low single-digit operating profit margins and very low returns on invested capital,” he says.

“And they certainly don’t change hands at ten or 15x sales or 50 or 75x EBITDA or operating profit. These are exactly the kinds of valuations that we’re seeing in the marijuana space and so there really is a gold rush mentality there.”

“Right now, it’s a total crap shoot and we just don’t have confidence playing the space, but we’ll concede that [Canopy Growth] is probably one of the strongest of the pack,” he says.