Like other marijuana stocks, GW Pharmaceuticals (NASDAQ:GWPH) has struggled for the last three months. Despite its U.K.-base of operations, it has behaved similarly to the stocks of its Canadian peers. GWPH stock is down 20% in that time, while the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) has lost close to 31%.

However, a recent surge in the stock price coming into the new year has given hope to investors who saw the shares lose nearly half of their value in the final quarter of 2018. Moreover, due to the therapeutic potential of one of its drugs, it has received some degree of relief from the Schedule 1 designation that has hamstrung the cannabis business on a federal level. However, barring any major reforms to U.S. cannabis laws, a correct understanding of one key metric will probably continue to define the performance of GWPH stock.

GWPH Avoiding Stigma Weighing on Other Marijuana Stocks

Despite a name that implies a focus on pharma and biotech, the company happens to derive all of its treatments from cannabis. However, it benefits from one key difference. GW Pharma has effectively used cannabis to treat two rare but severe forms of childhood epilepsy. Due to this success, the company persuaded the DEA to redefine Epidolex as a Schedule 5 drug after it received FDA approval. This allows Epidolex to avoid the Schedule 1 status stigmatizing many other cannabidiol (CBD) products.

GWPH has traded like a marijuana stock such as Canopy Growth (NYSE:CGC), Aurora (NYSE:ACB), or Tilray (NASDAQ:TLRY) in recent years. Since peaking in early October, it has fallen steadily, a fall that accelerated after cannabis in Canada became legal. Now, it has fallen by over 36% since that early October peak. All four stocks are among the top 10 holdings in the 35-stock portfolio comprising ETFMG Alternative Harvest.

Common Metrics Hard to Apply

Measuring whether an investor can consider GWPH stock a buy remains difficult, especially when measuring with more common metrics. The shares currently trade at around 290 times sales. However, that compares to 2018 revenues. Analysts forecast about 890% revenue growth in 2019 and an additional 260% in 2020. If those estimates prove correct, GWPH would trade at 8x 2020 revenues.

Moreover, in one of the few cases of more marijuana suppressing an appetite, legalization killed the buzz surrounding Canadian marijuana stocks. However, if the U.S. experiences the same type of buildup toward legalization, investor interest could make a comeback.

Look to the Moving Averages

Nonetheless, this has not occurred yet. Many investors will take solace in the action seen in GW Pharmaceuticals stock in recent days and in the charts. Since an intra-day low of $90.14 per share on Dec. 27, the GWPH stock price has increased by 30%. Still, even with the move higher in recent days, GWPH trades below the 50-day and 200-day moving averages (MA).

The moving averages seemed to have influenced the stock. In October, the 50-day MA switched from acting as a price floor to a price ceiling on GWPH. Moreover, until November, this 200-day MA appeared to serve as a secondary floor on the stock price. Once, the GWPH stock price broke through that floor, it did not stop falling until hitting that low in the low $90s per share range.

Thanks to the recovery, GWPH stock closed Tuesday above $117 per share, near the 50-day MA of almost $123 per share. Here investors will find out whether the 50-day MA still serves as the ceiling. Even if it breaks through, investors will face the same question around the 200-day MA which now stands at about $138 per share. These lines could serve as an indicator as to whether GWPH has staged a comeback or finds itself in the midst of a dead-cat bounce.

Bottom Line on GWPH Stock

Considering a recent decline and partial recovery of GWPH stock, the moving averages will continue to influence the equity’s performance. Before the October swoon and legalization in Canada, these MAs served as a floor on the GW Pharma stock price.

However, both high valuations and a “sell the news” phenomenon hit GWPH after cannabis became legit north of the border. By November, the stock had fallen through the 200-day MA and then hit a trough at just above $90 per share.

Now, with the stock marching higher at a rapid pace, it looks positioned to return quickly to these old inflection points. Whether these MAs serve as a floor or a ceiling on the price of GWPH stock will likely define the shares’ performance in the months to come. Thanks to this post-Christmas recovery in GW Pharma stock, investors should know the answer to this question soon.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.