Why I think Canopy Growth stock may sit well in a UK portfolio

Canopy Growth (NYSE:CSC) stock is one of the biggest names in the cannabis space. Should UK investors buy into the share price?

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Leading marijuana player Canopy Growth (NYSE: CGC) stock is down over 20% year-to-date. That decline technically means the shares are in a bear market. Similarly the ETFMG Alternative Harvest ETF, a marijuana-themed exchange-traded fund (ETF), is down about 24%.

In the UK, we are now witnessing more public debate on medical marijuana, cannabidiol (CBD), and the rapidly changing cannabis industry. Medical cannabis is becoming a recognised investment theme. Therefore today I’ll discuss whether UK investors should consider adding marijuana stocks to their portfolios.

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Canopy Growth stock faces headwinds

Canopy Growth’s Q4 results in May came in below analysts’ expectations. It posted revenues of $80.46m (it reports in US dollars) for the quarter ended March, missing estimates by around 15%. A year ago, revenue was $70.74 million. The quarterly loss was $1.16 per share versus the expected loss of $0.30. The number was $0.67 per share a year ago.

Put another way, like many of its peers, the Canada-based marijuana producer has so far not been able to convert revenue growth into real profits. And Canopy Growth stock is a testament to the woes of the industry. About 18 months ago, in October 2018, CGC shares had seen an all-time high near $60. Now, the stock is hovering around $16.

Like most other cannabis companies, Canopy has three segments of revenue:

  • Canadian consumer (i.e., retail recreational)
  • Canadian medical
  • International medical

Currently, Canadian retail recreational remains the most important segment for Canopy Growth.  Yet over the past year, a lack of growth in the Canadian recreational segment has meant lower gross margins and higher operating expenses. Medical sales were not enough to produce the much-hoped for profits either.

On a more positive note for shareholders, beverage giant Constellation Brands has a 38% stake in Canopy Growth stock. Analysts believe Canopy will likely lead the cannabis-infused beverage market. In the coming weeks, I expect CGC stock to trade between $12.50 and $17.50. I’d buy, but potential investors may find more value in the shares if the price declines toward the $15 level or below.

Foolish takeaway

The gold-rush hype surrounding the cannabis space is over. But that may not be such an adverse development for those investors looking to enter the  industry for the long run. The global medical cannabis market size is around £10bn. By the end of the decade, the market is expected to be over £100bn.

For those investors looking to add shares of cannabis companies, there is also a UK-based ETF. Earlier in the year, HANetf and Canada-based asset manager, Purpose Investments, launched The Medical Cannabis and Wellness UCITS ETF (CBDX) on the London Stock Exchange (LSE).

Canopy Growth is not included but the fund may still deserve your interest. It consists of publicly listed companies conducting legal business activities in the medical cannabis, hemp, and CBD industry. That includes producers and suppliers of medical cannabis, CBD-focused biotech companies, companies leasing property to medical cannabis growers, and software solutions for medical cannabis producers.

Our readers may be surprised to learn that Britain is the biggest producer and exporter of legal cannabis in the world. And that is thanks to one drug, Sativex, produced by Cambridge-based GW Pharmaceuticals (NASDAQ: GWPH). In 1998, the company obtained a unique Home Office licence to cultivate cannabis seeds. Since then, it has been producing Sativex to treat spasms in multiple sclerosis patients. GWP makes up around 10% of the CBDX.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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