Canopy Growth (NASDAQ: CGC) is a bit of a grinch this Christmas. Rather than giving, it's taking back shares from investors. The company used a reverse stock split this week to get its share price back up to over the all-important $1 mark so that it can stay on the Nasdaq exchange.
A reverse split doesn't mean anything for investors as your total value in the stock remains the same; if you were down 90% in Canopy Growth stock, you're still down 90%. The higher price doesn't mean anything. But the reverse split is symbolic of one thing: the gloomier outlook for the stock and the industry as a whole.
Promises of future growth just aren't enough
Back in 2019, when Canopy Growth announced it was planning to acquire multistate marijuana company Acreage Holdings, there was a lot of excitement surrounding the business and its future growth. What a genius move to secure a deal in advance. The worst-case scenario is that investors would simply have to wait for it to pay off. That was enough to lure in investors and convince them that investing in Canopy Growth would be a no-brainer investment.
The problem is that here we are at the close of 2023, and the deal is no closer to closing. Since then, Canopy Growth has secured similar-type arrangements with other companies, including cannabis-extract company Jetty Extracts and edibles maker Wana Brands. It's gotten to the point that the company wants to house these investments in a special-purpose vehicle, Canopy USA -- a move that the Nasdaq isn't on board with, at least not for now.
But the hype is gone. Plans for Canopy USA are not enough to convince investors that this is a surefire growth stock worth investing money into anymore. Canopy Growth's failures have been symbolic of the cannabis industry's struggles overall. Over the past five years, shares of the business are down a staggering 98%. Promises of better times ahead just aren't enough to sway investors anymore.
That is why Canopy Growth finally has resorted to consolidating its shares; it hasn't needed to rely on that strategy in the past.
The stock has become a speculative buy
There isn't a strong fundamental reason to invest in Canopy Growth today. The business isn't growing, and it's still incurring losses. The company has been divesting of facilities and even entire businesses, including sports-drink company BioSteel, which it says was a drain on its cash resources. But I'm doubtful that selling BioSteel will be enough to fix Canopy Growth's problems.
The main investing thesis around the stock centers around U.S. legalization. While many investors have given up on the stock, there are still those who are optimistic that once legalization happens, Canopy Growth will close its U.S. deals, and poof, sales will take off and stock will as well.
But this means investors are relying heavily on the U.S. to legalize marijuana. And predicting if and when that will happen is next to impossible. This is where speculation has taken over. Canopy Growth's beta value is more than 2, which tells investors it is much more volatile than the overall market.
Canopy Growth isn't a stock worth betting on
It may be tempting to think that Canopy Growth's stock can't go lower, but it's that mentality that likely convinced many investors into buying the stock six months ago, a year ago, two years ago, or even before that. Until the fundamentals improve, Canopy Growth simply isn't a worthwhile investment to consider. There are much better growth stocks out there for investors to buy and which don't come with nearly as much risk as Canopy Growth does.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
