Canopy Growth Comes Back To The Forefront As States Scramble To Find Revenue

Canopy Growth (CGC) recently announced earnings that could only be described as abysmal: a quarterly loss of C$1.3 billion, or C$3.72 a share. This was in comparison to a loss of C$379 million in the prior year-over-year quarter reported by CGC.

Not surprisingly, CGC stock, which had been moving substantially higher, took a major hit. The stock dropped from $22, to where it now trades, just below $17.

So, why might the cannabis stock, which reported lousy earnings, and has now dropped more than 23%, actually be a buy?

As we all know, the current health crisis caused by the coronavirus pandemic and COVID-19 infections has been a hardship on individuals and many companies. And some sectors, like the restaurant, travel, and leisure industries, have taken it on the chin harder than others. But, there is another victim of the virus, not exactly broadly represented in the stock market, we should be aware of.

States and municipalities have spent hundreds of millions of dollars to fight the pandemic, provide necessary services, and find new ways—such as new online services—to fulfill governmental responsibilities.

In order to refill governmental coffers, states will have to be creative. Raising taxes, which will likely happen, may provide a muted benefit as the unemployment rate has skyrocketed.

New Mexico’s governor, Michelle Lujan Grisham, directly addressed the possible legalization of recreational cannabis in a recent update on how the state is dealing with COVID-19. Grisham said cannabis tax revenue would mean: “…nearly $100 million of recurring revenue into the budget.”

I believe we’ll see this theme play out over and over in states that have to raise additional revenue. And the necessity of raising tax revenue should prove a boon to a number of cannabis companies.

Canopy Growth, as one of the largest cannabis producers in North America, may be a major beneficiary of this trend. The pullback after the CGC’s earnings announcement miss may turn out to be a major buying opportunity for investors to benefit from the trend.

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Disclosure: None.

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John Doee 1 year ago Member's comment

Thank you Eddy for this article. I could be wrong, but I was reading about how the different cannabis companies have actually done quite well during this Pandemic. Why you you think these 3 specific companies/their stocks have not done as well?