Canopy Jumps 25% on Strong Q3 Results: New Rally in 2020?

Cannabis investors looking for a reason to be optimistic about 2020 just got a huge blast of great news.

Canopy Growth Corp (TSX: WEED, NYSE: CGC), the largest cannabis company in the world, jumped as much as 25% in one day after reporting better than expected third-quarter results.

The good news sent CGC and other cannabis stocks rocking. While those short-term gains are promising, this report may signal that cannabis stocks are ready to rebound in 2020.

Here are a few highlights directly from Canopy’s press release.

Third Quarter Fiscal 2020 Corporate Financial Highlights

  • Revenues: Reported Net Revenues increased 62% over Q2 2020, or 13% excluding the impact of portfolio restructuring charges.
  • Gross margin: Gross margin before fair value impacts was 34%. Gross margin performance in quarter benefited from lower period costs due to higher facility utilization.
  • Operating expenses: Total operating expenses decreased 14% versus Q2 2020 primarily due to a $20 million reduction in G&A expenses and over $31 million lower stock-based compensation versus the prior quarter.
  • Cash Position: Gross cash balance was $2.3 billion, down from $2.7 billion in Q2 2020, reflecting the EBITDA loss, capital investments and M&A.
  • Market Share: Maintained leading market share in retail, at an estimated 22%, of the Canadian recreation market as we saw a strong demand for both premium and value-priced dried flower and pre-rolled joints.

I believe that this better than expected earnings report could be exactly the spark that Canopy and the broader cannabis sector needs to launch a new bull market, and here’s why…

#1 – Follow Through Buying from Fund Managers

There are a lot of short-term traders on Wall Street, but the big capital that flows in or out of stocks comes from fund managers who control trillions of dollars. This crowd doesn’t move as quickly as the short-term traders. They take more time to analyze fundamentals and then make the decision to deploy cash.

The Canopy results represent a clear shift in the trajectory for Canopy. I expect this shift to attract new capital inflows from fund managers. Individual investors will also have more time in the next few weeks to absorb the results and deploy cash.

#2 – Shorts Could be Forced to Cover

Cannabis stocks are one of the most shorted sectors in the entire stock market. For example, even after Friday’s solid gain, Canopy’s short interest is at 19%. With a market cap of $8 billion, that 19% short interest represents close to $2 billion.

The shorts had a very good year in 2019, much to the chagrin of longer-term investors. However, the ride is shifting against this crowd. If Canopy continues to creep higher, and I expect that to happen, more and more shorts will be forced to buy their shares back. This buyback would initiate another huge wave of buying.

#3 – Canopy is Executing Better than Peers

Canopy is distinguishing itself from its competition by better executing its growth strategy. For example, while Canopy reported third-quarter sales growth of 62% from the previous quarter, Aurora Cannabis, the second-largest cannabis company in Canada, saw revenue fall 26% from the previous quarter.

#4 – New CEO David Klein is Playing to Win Big

This was Canopy’s first quarterly report under new CEO, David Klein. Even though the results didn’t include his time on the job, it signals that a strong new regime is taking over. I expect Klein to continue cutting expenses, expanding margins, ramping new products and sales, and creating new partnerships.

Canopy Forming a Long-Term Bottom on the Chart

Canopy shares struggled in 2019, falling more than 50% from the 52-week high.

However, Canopy appears to be stabilizing and forming a long-term bottom. Looking forward, I believe that we’ll hear more good news from Canopy this year, and I expect that to drive shares higher.

About the Author & Cannabis Stock Trades

Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.