Earlier this week, MKM Partners upgraded Canopy Growth Corporation (WEED: TSX) (CGC: NYSE) to a Buy rating from Hold. The upgrade comes ahead of the company’s fourth-quarter earnings report and we find the timing of the rating change to be of significance. 

Earlier this month, Aurora Cannabis Inc. (ACB: TSX) (ACB: Nasdaq) reported quarterly financials that came in lower than expectations. The company reported a sequential decline in revenue and attributed some of the decline to a challenging market landscape in Canada.

Although we expect Canopy Growth to report similar concerns with the Canadian cannabis market in its earnings report, we believe the management team has positioned business to benefit from the re-opening of the Canadian economy. 

According to MKM Partners, Canopy Growth is expected to return to sequential growth and has better aligned its supply chain to capitalize on increases in demand for cannabis. The brokerage firm believes that the market is underestimating recent cannabidiol (CBD) distribution deals that Canopy Growth entered into with Southern Glazer’s Wine and Spirits.

We consider this relationship to be an attractive aspect of the Canopy Growth story. The global cannabis company selected Southern Glazer’s Wine and Spirits as the distributor for Martha Stewart’s CBD product line in the US. Initially, Southern Glazer’s will distribute Martha Stewart’s line of CBD products across seven states and more states are expected to come on-line in the near future. 

We believe the market does not understand the significance of the relationship with Southern Glazer’s Wine and Spirits. The company is a leading global distributor of alcohol and we believe the relationship can be a major catalyst for its cannabis beverage business.  The distribution agreement comes after the companies entered into an arrangement to distribute Quatreau, Canopy Growth’s first line of CBD-infused beverages to be sold in the US. 

2021 has been a roller coaster ride for Canopy Growth and the stock has fallen more than 55% from its February high. We believe the relationship with Southern Glazer’s Wine and Spirits will serve as a catalyst for growth and expect Canopy Growth to report stronger beverage sales as the relationship continues to become more significant on a going-forward basis.