“The stock market is filled with individuals who know the price of everything, but the value of nothing.” —Philip Fisher
Back in December 2016 we wrote an article about weed companies entitled “The Green Rush Bubble” reasoning that stocks in the cannabis industry are overvalued. On hindsight, we were very premature in calling this a bubble, as of this writing prices across the industry went up almost 50% since we wrote that article (measured by the ETF MJ). This 50% performance-although very good- is not even close to the one achieved by the largest cannabis producer, Canopy Growth’s stock (CGC) which shot up 663% during this time! Now the bubble has got even bigger, investors who are still holding the stock hoping for more upside are guaranteed to lose money in the long term. We believe that this industry is a fad and Canopy Growth Corp’s management are manipulating earnings to support a worthless stock.
Let us explain …
A rookie analyst would notice that Canopy’s financials are full of red flags. Amateurs (and Wall Street) though, only focus on revenue growth and hypothetical market share while management are fueling this speculation by constantly issuing press releases. Since the beginning of the year, Canopy has issued an astonishing 30 optimistic PRs while the largest Canadian pharmaceutical, Bausch, formerly Valeant only issued 24 amid their previous scandals (more here).
The hype is around revenue growth and market share. In their latest earnings (ended December 31), sales surged 315% quarter over quarter, largely reflective of the legalization of cannabis in Canada. However, accounts receivable and prepaid assets have been rising at an alarming rate faster than revenue: