Canopy Growth Corp (NYSE:CGC) Peer Price Divergence Taking Shape

Benjamin A. Smith
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It’s only a recent phenomenon, but it appears that Canadian cannabis sector is diverging away from Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) as a proxy for market performance. This is noteworthy, as its peers have traditionally mirrored Canopy’s price movements at-large.

If there was such thing as a single-stock futures contract in any sector, Canopy Growth was it. The price action of Horizons Marijuana Life Sciences Index ETF (HMMJ) components have dipped and risen based on Canopy’s price sentiments since the industry became a “thing”. But in post-legalization times, that influence has been waning. Recently, the disparity is becoming more acute.

If we look at Canopy Growth’s peer correlations over the past 6 weeks, some breakdown is taking place. While CGC started the year on fire—leading some of its immediate peers by a wide margin—things have cooled. Of course, CGC’s news cycle was more active early on, with positive analyst coverage from Piper Jaffray and New York hemp license acquisition leading the way. Still, Canopy’s peers have markedly risen without their lead soldier regardless, displaying characteristics rarely seen before in the Canadian cannabis space.

On a more recent timeline (10 days), the overall picture is just as supportive. While CGC languishes ↓2.42%, its immediate peers are mostly flat-to-higher—with ACB and Hexo Corp. decidedly so. Canopy’s twin laggard, Aphria Inc. (+3.82%, as of this publishing), has moved strongly today even though CGC remains in negative territory. Such price action disparity rarely occurs in the absence of material news events.

Even more odd is the complete lack of response to Aurora Cannabis’ recent news that it has appointed Nelson Peltz as a Strategic Advisor. Nelson Peltz is the Chief Executive Officer and a Founding Partner of Trian Fund Management, L.P., a multi-billion dollar investment management firm with investments all over the Fortune 100 map.

While that news is obviously more specific in nature, the lack of any trickle-down into CGC is striking. After all, if Aurora Cannabis is setting down deep institutional roots, Canopy Growth can’t be far behind. Although much of ACB’s run is certainly about investors anticipating future conglomerate partnerships—Nelson Peltz sits on the Proctor & Gamble‘s Board of Directors—the lack any ancillary trickle-through is noteworthy.

Of course, market correlations aren’t the be-all-end-all. Different companies are embroiled in their own individual news cycles at any given time, making them relatively stronger and weaker depending on current news flow.

Still, when the sector’s clear leader is lagging, investors are wise to take notice.

Final Thoughts

Ultimately, what does this growing recent divergence between Canopy Growth and its peers mean? In my opinion, it signifies that the Canadian cannabis sector is maturing, no longer necessarily beholden to the whims of Canopy Growth price action. That’s a positive thing, because market ebbs & flows have certainly been top-heavy over the preponderance of time.

But swing investors and those seeking solid longer term entries should also be cautious here. Rarely does a market really take-off when it’s leader struggles to gain traction. The market is still stable enough that strong moves are still being made in individual issues with risk assets “melting-up”. But ideally, you want the lead horse along for the ride (this could still happen).

Midas Letter will continue following this narrative, and file addition commentary as warranted.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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