Canopy Growth (NYSE:CGC) is back. The new legal status of hemp in the U.S. has given CGC an opportunity to enter the world’s largest cannabis market, and Canopy Growth stock is again approaching 52-week highs.
However, those highs also leave Canopy Growth stock trading at an elevated multiple. Such valuations are common for hot stocks in new industries, and CGC should become a much larger company as time goes by. Still, given the magnitude of Canopy’s move higher, interested investors should wait for CGC stock price to drop before buying the shares.
Click to Enlarge Source: Shutterstock
Canopy and its peers such as Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY) and Cronos (NASDAQ:CRON) have experienced a roller-coaster ride over the last four months. With cannabis gaining legal status in Canada in October, the bubble popped in Canadian cannabis stocks. In just over two months, Canopy Growth stock had lost just over half of its value.
Canopy Growth Stock Will Lead the Way in Hemp
Now, it’s the U.S.’s turn. On Dec. 20, President Donald Trump signed the most recent farm bill into law. The legislation fully legalizes hemp, a form of cannabis.
Much as it led the way in Canada’s marijuana industry, Canopy has now become the first company to attain a license in the state of New York to produce and process hemp. This move has helped Canopy Growth stock recover most of its post-Canadian-legalization losses. As a result, Canopy Growth stock is trading at about $49 per share, just 17% below its 52-week high.
Due to U.S. laws, most marijuana companies operate only in their home states. Even fewer have made it to the U.S. stock market. As a result, much larger Canadian firms now hold a first-mover advantage, and Canopy Growth has. definitely moved first
Investors should also realize that the hemp industry will become significant on its own. Among the products that will be made from hemp are new varieties of clothing, construction materials, and biofuels. Also, the legalization of hemp kicks off the American marijuana boom. With nine times the population of Canada, America could generate demand for cannabis that would make last year’s boom in Canadian cannabis appear tiny in comparison
Thanks to CGC’s first-mover status, its alliance with Constellation Brands (NYSE:STZ), and its status as Canada’s largest cannabis company, Canopy Growth stock will greatly benefit from this boom. Currently, the market cap of CGC stock is just under $17 billion. InvestorPlace’s Luke Lango believes the market cap of CGC stock can reach $100 billion. I think Canopy Growth stock will indeed reach that milestone.
Beware of the Valuation of Canopy Growth Stock
However, I think investors will struggle to find the right time to buy CGC stock. So far this year, the shares have risen by over 80%, causing the already-elevated multiples of Canopy Growth stock to climb much higher. The forward price-earnings ratio of CGC stock has reached 385. and it now trades at over 150 times its sales. Moreover, a bearish double top could form near the stock’s 52-week high of $59.25
Given these facts, nobody should be surprised if CGC retreats. Still, in light of the potential of CGC stock and the industry in general, I recommend buying the shares on any pullback.
Final Thoughts on Canopy Growth Stock
Canopy’s decision to produce and process hemp in New York has likely ushered in an American marijuana boom. However, prospective buyers of CGC stock should wait for the shares to retreat.
Thanks to the legalization of hemp, Canopy Growth and its peers can enter the U.S. market with fewer legal worries. Even if other types of cannabis aren’t legalized for years, demand for hemp and CBD-related products should enable the industry to grow massively in the years to come.
Unfortunately for investors looking to establish positions in Canopy Growth stock, others have discovered the stock’s powerful, positive catalysts, and their bids have enabled Canopy Growth stock to close in on its 52-week highs. That, along with CGC’s stratospheric price-sales ratios, makes going long CGC stock dangerous, since such gigantic ratios tend not to last over the long-term. Also, previous highs can sometimes act as price ceilings for stocks.
However, both Canopy Growth and the cannabis industry as a whole will grow massively over the next several years. Investors who buy CGC stock now should profit over the long run, but their profits might be higher if they don’t pull the trigger for awhile.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriti