Sunday night’s equity futures trading foretold an ominous Monday open, and it was red indeed. But then the surprise was that the indices recovered almost all their losses by day’s end. Even among the mid-morning selloff there were a few good stories to tell. As the indices were still falling, I saw favorable price action from stocks like GW Pharmaceuticals (NASDAQ:GWPH) stock and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). So I jumped long on the GWPH trade because of its technical patterns in the stocks charts. And therein lies today’s opportunity.
I had noticed that GWPH stock had hit my upside target from the breakout that happened at $154 per share on their last earnings report. But there was now the setup going into a new breakout.
Last night, GWPH reported earnings, and the investors are loving it. The marijuana stock is up almost 9% on the headline. My thesis was that there is conviction in the stock, enough to perhaps trigger another leg higher. If the bulls can maintain the breakout from the all-time high, they should target $235 per share — or higher!
Numbers for GWPH Stock
The earnings were good, as management beat both the top and bottom lines. This will embolden analysts to continue to support the stock.
But more exciting was that they also announced positive results from an important phase-3 trial on their Epidiolex oral medicine for patients who suffer from some types of epilepsy.
This double positive headline should have legs, meaning the bears will need specific reasons to fade it. True there is the potential of a negative market wide headline from the White House and both biotech stocks and marijuana stocks can be a choppy bunch, but the selling effect on GWPH stock should be temporary.
If you’re long the stock, then the earnings report and the happy news from the phase 3 trials are reasons enough to stay long it. The next target should be $30 higher. But starting new positions now would require having a lot of faith in the overall market conditions and the immediate future of GW Pharma.
This is not the same as saying that I don’t see good things for GWPH. I am merely noting that this is not an obvious spot to go long a stock. It is, after all, at all time highs so there is always room to drop. But this also depends on the investor time frame.
If my intention is to hold the stock for a long time then I shouldn’t try to time the entry. Chasing a surgical entry point in the long term is futile. But for those who prefer to trade GWPH shorter term then I’d wait for a retest of the breakout line that we crossed this morning.
Click to Enlarge Fundamentally, this is not a cheap stock so bulls need to have great intestinal fortitude to own it. It is a momentum stock, so it moves fast in either direction. But with high risk comes high rewards.
GWPH came into the earnings report up almost 90% year-to-date. It’s up almost 170% in five years. This is more than triple the performance of the S&P 500. So it does reward those who risk their capital on its froth.
Depending on your perspective, there is the added benefit (or curse) of GWPH being bundled in with marijuana stocks. So for as long as that thesis is running wild then GWPH will trade along with them in stages.
In short, this week is starting very bullish for GW Pharmaceutical stock. Management is delivering on promises so the stock should also continue to deliver profit to its holders. Up remains the thesis on it for the mid and long term.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.