Beaten down Canopy Growth Corp is a buy, this investor says

The cannabis sector is about due for a recovery, according to portfolio manager Bruce Campbell of StoneCastle Investment, who argues that in an industry still trying to find its feet, you’re best off choosing the clear leader, which in this case is Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart, News TSX:WEED).

Pot stocks have been struggling for a number of months now as the market grows wary of putting more money into both companies and an industry that have yet to prove themselves. And while it’s a given that there will be some winners and a tonne of losers once the dust has settled, the task of separating the wheat from the chaff sure isn’t easy.

Best to go with the horse that has led this race right from the start, says Campbell.

“The sector itself we think is very close to turning and starting to have positive performance again,” says Campbell, founder of StoneCastle Investment Management, who spoke to BNN Bloomberg on Wednesday.

“Canopy is the leader as far as cultivation facilities go, as far as geographic regions that they’re in — they’re in 14 different countries now —and they’re probably going to lead the way as far as some of the
derivative products go that will be released in December.”

“They haven’t talked a lot about that but I guess that we’ll start to see it in December and then when they hit the shelves in early January,” he says. “We don’t own it right now but if we were looking to enter the sector and only owning a single company, that would probably be the one that we’d own because it’s the biggest and most diversified.”

Canopy Growth has had a summer of unrest, starting with the firing of co-CEO Bruce Linton in early July which was followed by a disappointing earnings report in August, one which saw the Smiths Falls, Ontario, company post a loss of $1.28 billion during the three months ended June 30 on revenues of $90.5 million.

That top line came in lower than analysts had expected, where the consensus forecast was for $107.1 million in revenue.

Canopy’s share price had been dropping since late April along with the rest of the sector, and while the stock showed a bit of life earlier in September, this past week seems to have snuffed out that rally. WEED lost nine per cent of its value last Thursday, seemingly in response to a coverage initiation report from Oppenheimer which rated the stock a Hold, saying that it will likely be two more years before the company turns profitable .

Overall, Canopy has lost 54 per cent of its value since late April. But the stock has been in the doghouse before, Campbell argues, only to rise again with a vengeance.

“We’ve looked at the last eight times that Canopy has sold off and the last eight times that it has recovered after that,” says Campbell. “The average of its declines is 42 per cent and right now it’s at 47 per cent. So, historically, it’s right around where it has been from a decline perspective. And then, obviously, the other side of that is fantastic returns as well.”

“Just looking at it from that perspective, we think it’s attractive,” he says.