Is It Time to Dump Your Shares of Canopy Growth?

Canopy Growth (NASDAQ: CGC) is a leader in the Canadian marijuana market. An early mover in the sector, the stock has gone through two massive price swings. Today, however, the stock is trading at around $1 per share, off from its all-time high of $568 by a whopping 99%. It may be time to consider selling the stock if you're sitting on material paper losses.

Marijuana stocks haven't worked out the way Wall Street had hoped

Wall Street often gets overly excited about hot investment ideas, pushing stocks to unrealistic extremes. That's exactly what happened with the marijuana sector, with a couple of massive stock rallies that priced stocks like Canopy Growth for complete perfection. But the marijuana business didn't prove to be quite as profitable as investors had hoped.

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Notably, competition in the legal marijuana space has been fierce. And illicit marijuana sales haven't stopped, so there are still competitors that don't have to deal with the costs of regulation and taxes. Canopy Growth, for its part, has yet to turn a sustainable profit.

How much have you lost?

To be fair, Canopy Growth has been inching closer and closer to black ink. But there are still several worrying facts to consider.

For example, it recently recapitalized its balance sheet, which has left it in a stronger financial position. But the fact that it had to take this action isn't a particularly good sign. Meanwhile, it is working on an acquisition to be funded with a mix of cash and stock. The deal will strengthen Canopy's position in the medical marijuana space, but the cash being spent will weaken the balance sheet, and the stock issued will dilute existing shareholders.

If you bought the stock recently, there's probably no reason to sell it. Presumably, you believe a turnaround is unfolding. That might actually be true. However, if you have large paper losses because you bought it at much higher levels, it might make sense to harvest those losses so you can offset capital gains taxes elsewhere in your portfolio. The big problem is that a return to the stock's all-time highs seems unlikely in the near future, given the mix of positive and negative news around the business.

Sometimes it is better to admit mistakes and move on. The ability to harvest losses for tax purposes helps soften the blow, but don't forget the lesson: Buying during periods of unbridled enthusiasm can turn good ideas into bad investments.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.