Sell your Canopy Growth stock, this fund manager says

Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED) has been a disappointing stock over the past half-year, leaving investors wondering whether and when the name and the cannabis industry as a whole are likely to turn around. So should shareholders sell their Canopy Growth stock?

Yes, says Scotia Wealth’s Mike Newton, who thinks that your money could be put to better use elsewhere.

Licensed cannabis producer Canopy Growth has been a clear leader in the pot space for years now, but the shine has come off the company and hence the industry as a whole over the past six months as markets grow impatient with cannabis companies, many of whom have yet to show signs of profitability now one into legalized cannabis in Canada.

Since hitting a high of $70 in April of this year, Canopy has lost a ton of ground and is trading in $20 territory, lows not seen since the early days of revved up interest in the pot industry. The slide has been sector-wide, though, with the Horizons Marijuana Life Sciences ETF, which tracks the cannabis industry across North America, having lost over 60 per cent of its value since March.

For his part, Newton says that investors who may have lost money on Canopy or any other sector name over the past while, there’s little sense in staying devoted to cannabis until the industry finds a better footing.

“You’re never stuck,” said Newton, portfolio manager and director of wealth management at Scotia, who spoke to BNN Bloomberg on Tuesday. “I’ve often said that where you’ve been is irrelevant to the stock.”

“I tell the story that if you’re on the eighth floor of a building and there are two elevators. The elevator and the guy beside you don’t know that you were on the 50th floor and now you’re on the eighth floor. You have a choice: you either get on the elevator that is a name that you’ve been killed on or you get on an elevator that’s a name that’s actually working, because there’s probably a better chance with a good quality name that you’ll get back to the 50th floor, slower and more steadily and probably with more certainty,” he said.

Canopy Growth reported weaker than expected earnings two weeks ago, coming in with a net loss of $374.6 million, including a $15.9-million write down on its inventory. For its fiscal second quarter 2020, revenue grew from $23.3 million a year ago to $76.6 million but that figure was lower than the previous quarter’s $90.5 million — not a good sign for a company and industry expected to be on a growth path.

Last week, Canopy shareholders got hit with more bad news as major investor Constellation Brands said that it would not be making further cash contributions to Canopy. The announcement was part of a regulatory filing by the beer and liquor giant, which is now two years into its multi-billion-dollar investment in Canopy and the cannabis space. Constellation reported that it had a net loss of US$125.4 million on Canopy over the past nine months.

Newton says that while cannabis stocks might look better in the new year, investors should get out for the time being.

“I think that there will continue to be some tax loss selling into the end of the year,” said Newton. “We had a big bounce off the bottom in all the cannabis stocks two weeks ago. Suddenly it seemed like [the selloff] had gone too far and there was a big ten to 15 per cent gain across the board. And then Constellation Brands came out and said that they’re not adding any more money to the Canopy Growth name.”

“I’m a little more lukewarm. I would take the loss, book it and relook in January,” he added.