Is Canopy Growth (TSX:WEED) a Bargain Stock?

High insider ownership is usually considered a good sign for a stock’s future prospects. When people who know everything about a company’s operations buy it, it indicates that the stock has a good future — or so the theory goes.

Enter Canopy Growth (TSX:WEED)(NYSE:CGC).

Recently, it was revealed that the company’s ex-CEO Bruce Linton had been buying up shares, calling its August beatdown a “sale,” and re-affirming his belief in the company’s long-term soundness. Prior to this, investors had sent WEED shares tanking after a surprise earnings release that showed an unprecedented $1.3 billion net loss.

Although he’s technically no longer a Canopy insider, Linton was on the inside as recently as last quarter. This means that his opinion on Canopy may be worth listening to. Before assessing whether Bruce Linton is correct about this “sale,” let’s look at some of the criteria investors use to decide whether a stock is a bargain.

What makes a stock a bargain?

For value investors, stocks are generally considered cheap when their share price is low compared to their discounted future cash flows. The word future is key here, because it means that there’s no accurate way to measure the most important metric. Past cash flows don’t necessarily indicate future cash flows, and earnings projections can falter just as much as stock price forecasts.

To compensate for the lack of data on discounted future cash flows, value investors use a number of metrics to value shares. The price-to-earnings (P/E) ratio measures a stock’s price against its trailing 12-month earnings. The price-to-sales (P/S) ratio measures price against sales, which don’t necessarily indicate profitability but may be the only metric available for young companies that are still losing money. Finally, the P/E-to-growth ratio measures a company’s price and earnings against its earnings-growth rate.

Is Bruce Linton right?

With a basic understanding of metrics that value investors use to decide whether a stock is “on sale,” we can now tackle the main question: Is Canopy “on sale?”

Unfortunately, it’s not going to be an easy one to answer.

For one thing, the company is not profitable, so the trailing P/E ratio isn’t applicable.

For another, while the P/S ratio (41) is still extremely high, the price-to-book ratio (2.1) is actually fairly reasonable, so what metrics we do have give us conflicting signals.

The company’s quarterly revenue growth rate (249% year over year) is unbelievably high, and if it can be maintained for several years, it may even justify a P/S ratio in the 40s.

Put simply, the valuation metrics available for Canopy are extremely hard to read, which may be why investors in this and other emerging growth stocks prefer to use technical analysis.

Foolish takeaway

Ultimately, I think Canopy is still overvalued, even after the August “sale” — the reason being that I don’t think its current revenue growth rate will be maintained into 2020. Whenever Canopy releases earnings this year, it compares post-legalization revenue to pre-legalization revenue, because all the comparable “last year” periods were from before legalization. Legalization was an enormous catalyst that gave weed companies a huge one-time revenue boost, and there are no other catalysts like this on the horizon. So, revenue growth rates will most likely slow in 2020, and these extraordinarily high P/S ratios will be harder to justify.

You might be missing out on one of the biggest opportunities in Canadian investing history…

Marijuana was legalized across Canada on October 17th, and a little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

Besides making key partnerships with Facebook and Amazon, they’ve just made a game-changing deal with the Ontario government.

This is the company we think you should strongly consider having in your portfolio if you want to position yourself wisely for the coming marijuana boom.

Learn More About This TSX Stock Now

More reading

Fool contributor Andrew Button has no position in any of the stocks mentioned.

Source: The Fool
Is Canopy Growth (TSX:WEED) a Bargain Stock?
The Fool

The Motley Fool
Contributor for
The Motley Fool is dedicated to helping the world invest — better. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, mutual funds, and premium investing services.

In all we do, we take a different approach.

We believe – and have proven over decades – that the individual investor can beat the market.

We believe that anyone can do it, even if they don’t have a lot of time or money to devote to investing.

We believe in a long-term outlook, helping people build wealth over time.

We believe that the person best positioned to take care of your financial future is you.

And we work tirelessly on behalf of our hundreds of thousands of members who are enjoying the opportunities that come with having enough money to do the things that matter to them.

While we are headquartered in Alexandria, Va., The Motley Fool advocates for the individual investor around the globe with offices in the UK, Australia, Canada, Singapore, and Germany.

Related posts