Expect Canopy Growth Stock to Pass Its Big Earnings Test

Sentiment toward cannabis is recovering, and Canopy needs to keep it that way

Cannabis stocks have caught a bounce, and Canopy Growth (NYSE:CGC) has been one of the beneficiaries. CGC stock now has doubled from March lows.

It’s not alone. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ), which I use as a barometer of cannabis sentiment, has rallied 62% from its March bottom. That exchange-traded fund has rallied 30% in just the last eight sessions.

The rally makes some sense. Recent earnings reports suggest the industry is making its way through the impact of the novel coronavirus pandemic. And investors now are getting excited about what might be on the other side, as normalcy returns.

But that rally also sets up a huge earnings report for Canopy Growth on Friday morning. Better-than-feared results from smaller, weaker cannabis plays are one thing. A strong quarter from the biggest, and I believe best, play in the sector would be another.

Simply put, Canopy Growth on Friday can keep the sector’s rally going — or bring it to an abrupt halt. I believe it will do the former, and for the industry’s sake, it had better.

The Coronavirus Impact

Obviously, the problems for cannabis stocks didn’t begin with the coronavirus. The sector started selling off last March, as fears of oversupply hit the market.

I’m on record as believing those worries were driven by investors focused too much on the near term. But that doesn’t mean the concerns were false. The industry is brutally competitive. We’ve seen some companies build far too much capacity with far too much capital.

That said, it’s important to note that the sector was establishing a bottom toward the beginning of the year. Companies were pulling back on supply in a bid to protect margins. The days of fast and loose spending appeared to be coming to an end.

But the coronavirus, and the market-wide selloff it drove, did have an impact. It wiped out the bottom the industry was forming. The MJ ETF went from holding support around $16 to mid-March levels below $10. CGC stock saw similar trading, as the stock lost over half its value between mid-February and mid-March.

In the context of the long decline, the recovery that began in late March was rather muted. But the industry has accelerated in the last two weeks — and it’s not hard to see why.

Earnings Look Strong

Simply put, we’ve seen a number of reports from cannabis companies that not only aren’t as bad as feared, but actually look good considering the circumstances.

The first of the majors to report this month, Cronos Group (NASDAQ:CRON), actually posted rather soft earnings. Gross margins were weak, and the company cited disruptions to its sales from the coronavirus.

But since then, we’ve gotten better news from the sector. Tilray (NASDAQ:TLRY) posted 11% revenue growth quarter-over-quarter. Sales beat analyst estimates.

That was followed by the biggest report of late in the sector: a strong fiscal third-quarter report from Aurora Cannabis (NYSE:ACB). Aurora too posted sequential growth. ACB stock soared 69% on the news: it has now gained 170% in less than two weeks.

What we’re seeing from Tilray and Aurora, in particular, is that the shutdown in Canada and elsewhere in the world didn’t impact demand. Customers haven’t gone anywhere. And that would seem to bode well as we return to normalcy.

The Case for CGC Stock Ahead of Earnings

The good news for Canopy Growth is that I believe it’s a better company than either Aurora or Tilray. Indeed, I’ve recommended investors pass on both of those stocks.

Canopy is larger. Its brands are stronger. And its balance sheet is far better. Thanks to the multi-billion dollar investment from Constellation Brands (NYSE:STZ, NYSE:STZ.B), Canopy has plenty of dry powder to take advantage of a growing market.

Aurora and Tilray don’t. Both companies, including Aurora in particular, are cutting back in a bid to reach profitability. The fact that those companies still can drive growth shows how strong the Canadian cannabis market is at the moment, despite the doom and gloom surrounding the sector.

That alone is enormously bullish for CGC stock. After all, the market should get better as “Cannabis 2.0” products roll out. If Tilray and Aurora can drive growth, I’d expect more from Canopy brands like Tweed and Tokyo Smoke.

And Canopy can take advantage of that growth in a way that other companies can’t. It can put the pedal to the market in terms of marketing and research and development spending.

The opportunity here, from a long-term standpoint, remains enormous. And, simply put, Canopy is best-positioned to capitalize.

That’s why Q4 earnings on Friday morning are so important. As long as Canopy, too, is growing its revenue, it has an advantage everywhere else. And with CGC stock down 60% from its previous highs, there’s plenty of room for the rally to continue if the company can re-inspire optimism. A big report on Friday would be a huge step in the right direction.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.