Companies and Brands

Why Canopy Growth Received a Speculative Buy Analyst Rating With Big Upside

Jon C. Ogg

Published: August 16, 2018 11:45 am

Last Updated: January 11, 2020 7:17 pm

Wednesday’s market sell-off may have gone unnoticed by investors who have opted to invest in (or speculate in) some of the more widely known cannabis companies. Canopy Growth Corp. (NYSE: CGC) trades in the United States, but the Canadian medical cannabis company also trades under the WEED ticker on the Toronto Stock Exchange. The company has become a benchmark for the emerging legalization and medical cannabis segment, and a fresh investment from Constellation Brands Inc. (NYSE: STZ) just greatly increased its market value.

While the details of the Constellation investment have been widely covered in the media, Canopy Growth has now received a Speculative Buy rating from Canaccord Genuity. This new rating is based on the WEED ticker, with the target raised to C$50 from C$34, compared with a prior close of C$42.20. This represents 18.5% in implied upside, if the call proves to be correct.

Matt Bottomley, the analyst behind the Canaccord Genuity call, believes that Canopy Growth has seen a transformational event after a C$5 billion investment from strategic partner Constellation Brands. The investment came at a huge premium to the prior closing price and included shares and warrants that ultimately could allow Constellation to become the majority owner with a stake of greater than 50%.

While there are some greater details in the upgrade, the model was updated to reflect the investment and based on plans to expand into about 30 global markets. The company is said to have about $1 billion in global acquisition targets already in mind. The company is shown already to have a presence in 11 countries.

Bottomley now sees revenues of C$78 million in 2018, followed by estimates of C$353 million in 2019 and then C$919 million in 2020. He said in his upgrade:

We believe this represents a transformational event for Canopy (and the industry as a whole) in the form of a substantial commitment from an established, international partner that is a top tier producer/distributor of alcohol worldwide. More importantly, even prior to this deal, we believe Canopy had a top-three presence on the global cannabis stage in the 11 countries where it has secured exposure. With C$5B slated to hit the balance sheet later in October, we believe Canopy is now second to none with its ability to expand this platform even further; with ~12x more cash than its largest Canadian competitors at this time. As a result, we believe the company is substantially better suited to execute on a global first mover advantage with the capital and strategic leverage provided by Constellation.

Additional commentary supports the higher price target here. Canopy Growth continues to build inventory in anticipation of recreational demand and also is well positioned as a leading supplier for the recreational market.

Shares were last seen down almost 3% at C$40.95 in Toronto, in a 52-week range of C$8.36 to C$48.72. Its market cap is C$9.07 billion.

The New York-listed shares of Canopy Growth have been more actively traded on the news. They were last seen down 1.6% at $31.60, in a 52-week range of $16.74 to $36.55. Its U.S.-listed market cap is $7.06 billion.

It is important to consider that Canopy Growth’s shares popped 30% in New York on Wednesday and on more than 35 million shares. That premium matters because implied upside of 18.5% might seem smaller than some “Speculative Buy” ratings are assigned. Equally important is that most Dow Jones industrials and S&P 500 stocks that are given new “Buy” ratings from the larger brokerage firms on Wall Street are coming with 8% to 10% in targeted total return upside (gains plus dividends). All this adds up to where some “Buy” ratings imply much higher potential upside for investors than others.