Canopy Growth has rallied amid renewed hope for cannabis legalization. Is it a buy?

Shares of Canadian cannabis marketer Canopy Growth (NASDAQ:CGC) have rallied over the past few weeks amid renewed hope that the US Congress will soon move to decriminalize weed on the federal level. Is now the time to buy?

A Volatile 2022 as Legalization Negotiations Drag On

Canopy (CGC) shares have rocketed 73% over the past 30 days. This is part of an overall upswing among cannabis stocks, although CGC has outperformed its major rivals. Shares of competitors Tilray (TLRY) have jumped 22%, Aurora (ACB) 24% and Cronos (CRON) 9%. In comparison, the S&P 500 has risen 10% over a 30-day span, as of Aug. 17.

Despite the recent run-up, Canopy shares are still down nearly 60% since the beginning of the year, pulled lower in part by concerns about the profitability of the Canadian cannabis market, Congressional delays on decriminalizing weed in the US and the company’s lackluster financial performance.

Short interests have also contributed to the stock’s volatility. According to data published by Seeking Alpha, a little more than 9% of the company’s float of 268M shares were held by short interests.

Like fellow Canadian cannabis player Tilray (TLRY), Canopy has worked hard to diversify its revenue stream from its core adult-use cannabis products. In addition to branded cannabis, Canopy also sells sports drinks under its BioSteel label, infused beverages, skincare products, CBD oils,and vape devices.

CGC also markets medical cannabis through its Spectrum Therapeutics unit and CBD-based products through a partnership with Martha Stewart. In recent months, Canopy has further expanded its presence in the US through deals with cannabis cultivator Acreage and cannabis gummies marketer Wana.

Despite this diversification, Canopy released a disappointing fiscal Q1 earnings report on Aug. 5 that showed a widened quarterly loss on 8% lower revenue. The results also showed Q1 revenue flat with that of Q4.

The company attributed the year-over-year top-line drop in part to a decline in Canadian recreational flower sales “due to a deliberate business transition to focus on higher margin, premium and mainstream products.”

In remarks accompanying the earnings report, Canopy CFO Judy Hong said the company expects costs savings to increase during the second half of the year, “enabling us to execute on our path to profitability, even as we continue to invest in strategic growth initiatives.”

Despite the report, Canopy shares shot up 22% on Aug. 8 amid a broader rally of cannabis stocks. The advance was stoked by remarks made by US Sen. Cory Booker, who suggested that Congress could soon take up a compromise bill on legalizing cannabis, which he referred to as the SAFE+ banking bill. But Booker also admitted that it could be tough to pass the bill before the current congressional session ends in early January.

In a note dated Aug. 12, MKM Partners analysts said that talk of a compromise bill on Capitol Hill was heartening.

“The US companies would benefit the most from a SAFE+ compromise, but the immediate stock reactions could be Canadian LP’s. Canopy, Cronos, Tilray, favored US exposure in order, have the best US exposure with equity options,” they added.

Is CGC a Buy?

As of Aug. 17, Wall Street analysts, on average, rated Canopy a sell. Of the 21 analysts tracked by Seeking Alpha, two rated it a Strong Buy, while eight presented a Hold opinion. On the bearish side, five analysts have issued Sell ratings and six have given the stock a Strong Sell recommendation. SA authors rate it a hold.

“While the THC opportunity remains outside most investors’ time horizons, the US business, with Jetty, Wana, Acreage, TerrAscend, BioSteel, Martha Stewart, whisl, and Storz & Bickel, will be the primary value driver,” said MKM analysts, who rated the stock a buy in their Aug 12 note. “We believe investors should look through softness in Canada and to the US.”

Piper Sandler, which rated the stock underweight, said in a noted dated Aug. 7 that it believes Canopy can enter the US market even without Congress acting on decriminalization.

“Canopy has laid a foundation for growth in the US THC market with its agreements to acquire Wana, Acreage and Jetty, and its minority stake in TerrAscend,” the analysts wrote. “Federal permissibility will be the triggering event for each of these deals, however, Canopy has retained the option to enter into the agreements at its own discretion.”

On another front, Seeking Alpha’s Quant Rating system views the stock a Strong Sell, as of Aug. 17. While Canopy earned a B for valuation and a C for profitability, it also received a D+ for growth and revisions, as well as a D- for momentum.

For a more in-depth look at Canopy Growth, check out SA contributor The Cannabis Investing Podcast’s “Don’t Rule Out a Bull Market.”