In early April I wrote about going long Canopy Growth (NYSE:CGC) stock. That trade paid off quickly but after peaking at $52.50 per share CGC stock gave it back and has reverted to support. While this sounds disappointing it is where the opportunity lies today.
It is time to reload almost exactly the same CGC trade as before. I consider this a blend of tactical trade with the potential to making it a long-term investment. It all depends on the investor time frame. The difference will be how to manage the trade if price goes against it. But in either case the start is the same.
But First, Canopy Growth Fundamentals
The whole cannabis stock sector is speculative at best. Companies like Canopy Growth are trying to establish a legitimate business on Wall Street for the first time ever. This is not an easy feat and they are facing hurdles.
The regulatory obstacles are also opportunities which eventually will be incremental upside. There is no doubt that the bullish thesis for pot stocks is strong.
Bottom line, the popularity of pot is what drives the fanatical interest in these stocks.
This is not a fad. The interest is too strong to fizzle. Also there is too much action from mega-cap companies who are seeking to join the party if not already there. CGC was ground zero for this when it took $4.5 billion from Constellation Brands (NYSE:STZ). More investments followed like the one into Cronos (NASDAQ:CRON) from Altria (NYSE:MO).
Also the cannabis story is not local. This is a global phenomena but the markets here in North America are probably the sexiest to investors. Simply stated, the story is too good to dismiss so soon.
CGC stock is not for the faint of heart. They are called momentum stocks because they move fast in both directions. Case in point, yesterday it rose 4% on no specific news. So this makes it difficult to find the perfect trading points. So it is best to learn the levels that matter and use those as entry and exit lines.
Trading CGC Stock
Once CGC fell back into the $43 zone it slowed its deceleration because that is a support zone. These are not hard lines in the sand but rather rubber bands. I can buy it here and expect a bounce towards the last place it failed.
If will face resistance at $49 per share so I should lock profits once it reaches it. But this varies based on individual trading preferences and time frames. If it’s a tactical trade then I’d set my stop loss below $41.75 or $39.75 per share. Because if those fail, the bears could try to retest $33 per share. This is not a forecast but a scenario that could unfold.
The CGC stock fundamentals are the best of the bunch on paper. This is not to say that they are good. But they did receive the pile of cash from STZ and they are putting it to good use. Their strong balance sheets allows them to execute on plan comfortably. But they still need to grow their delivery capacity.
This is what Wall Street believes, and whether reality or not, perception is all that counts this early in the process.
Critics of cannabis do make valid arguments. But for every point of contention they offer, there are several other facets of the cannabis that offset that one negative. The applications for cannabis includes not just recreational use, but also medical, CBD, potables, edibles, etc.
So according to Wall Street we will smoke it, eat it, drink and rub it on our ailments. So to be a bear on cannabis now is like fighting a multi-headed beast. They can shoot down one aspect of the bullish thesis but there are several more that can still bite the sellers.
Nevertheless, it is important to temper the enthusiasm. Canopy Growth fundamentals from the traditional point of view are scary. And it is not alone as the whole sector carries very rich valuation with minimal opposing income. CGC has a market cap of $15 billion and only has a small fraction of it in sales.
So yes, they are expensive but the story is not in today’s dollar but rather several years out. The legalization trend is just starting. As more states follow the early movers, the North America consumption markets will grow exponentially.
Canopy is set to be able to cater to the incremental demand. They are literally forging the trail for the others to follow. Recently we saw them execute an inventive way of acquiring resources without breaking any laws. This is a team that is not afraid to make bold moves and take calculated risks.
If cannabis stocks are a viable thesis long term, then Canopy Growth is a winner. So far, CGC and ACB are up more than 65% year to date — four times the performance of the S&P 500.
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.