Canopy Growth Corp needs five or six good years to justify current valuation, this investor says

All eyes will be on Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart TSX:WEED) next week as the cannabis kingpin releases its quarterly financials, the first since the start of legal adult-use pot in Canada.

Those quarterly numbers are the dose of reality that discerning investors are looking for, says Bruce Campbell of Campbell, Lee & Ross, who says that looking for a good entry point is key for the cannabis sector, in particular.

Canopy Growth finished January up a remarkable 82 per cent, as the stock aims towards the $76.68 high it set back on October 16 of last year, the day before rec legalization (WEED is up almost five per cent as of late-day trading on Monday, hitting $67.00 per share).

The early 2019 rally has a number of factors behind it. Canopy announced in January its first foray into the United States’ hemp industry with a planned $150 million spend on production facilities in the state of New York. Also catching the notice of US investors was a coverage launch by Piper Jaffray early last month, bookended by Piper’s late January target increase from US$40 to US$60 per share. Tax loss selling in December was almost certainly a factor. And CIBC also threw in its two cents, crowning Canopy as the company most likely to become a “global titan” in cannabis.

But the January excitement over cannabis was industry wide with many companies benefiting — the Horizons Marijuana Life Sciences ETF which covers the sector in North America finished the month up 43 per cent, while Cronos Group , another company pegged to lead by CIBC, finished the month up 89 per cent.

Campbell says Canopy’s current valuation may be fine, as long as it generates consistent earnings growth.

“Like the group, [Canopy] was crazy expensive at one point,” says Campbell, chairman and portfolio manager at Campbell, Lee & Ross, to BNN Bloomberg. “We’ve compared it to junior mines. It’s like you have a discovery, a run-up and then you eventually mess it up with reality. And that’s kind of what’s happened here. You have to have revenue and you have to have earnings and so to justify the valuation you need about 30 per cent earnings growth over the next five or six or seven years.”

“So if you think that Canopy is going to be successful, then it’s probably fine,” he says.

Canopy last reported earnings on November 14, showing revenue of $23.3 million for the period ended September 30, up from $17.6 million a year prior. The company reported a larger-than-expected loss, however, of $330.6 million, representing $1.52 per share compared to the consensus estimate loss of 12 cents per share. Investors responded by dropping the stock eight per cent and WEED continued to slide until the end of December.

Campbell stresses that even with quarterly earnings coming in, the cannabis space is still not for the faint of heart.

“They’re so volatile that you’ve got to try to get a really cheap entry point to make some money, I think. It’s not for us, we just find it too volatile and too expensive [and] it’s tough to get a grip on a valuation,” he says.