Last year, cannabis stocks stole the show in a difficult stock market setting where regular stocks struggled. Marijuana stocks traded wildly for a while, but now they have settled inside more predictable and narrower trading ranges. That is the point of today’s write up. Pot stocks present a viable long-term trading thesis.
Coming into this morning, Canopy Growth (NYSE:CGC) stock is up almost 50% year-to-date and 200% since the beginning, This is in better than ETFMG Alternative Harvest ETF (NYSEARCA:MJ), and in line with stars like Cronos (NASDAQ:CRON) and Aurora Cannabis (NYSE:ACB). So other than Tilray (NASDAQ:TLRY), these stocks are beating the S&P 500 by a double.
This morning CGC stock is falling on news that the board terminated co-CEO Bruce Linton. Reactions to headlines are usually overblown, so this is definitely an opportunity for those who want to go long the stock and waiting for an opportunity.
The Opportunity in CGC Stock
Although we don’t know all the details yet, we know enough about it to know that there is a lot of money on the line. Canopy must find a suitable replacement for him to keep the train on track.
Canopy Growth has a lot going for it. This is the original marijuana stock that legitimized the bunch. That’s mostly because it attracted a $4.5 billion dollar investment from Constellation Brands (NYSE:STZ). That was a serious sum of money that caught the attention of Wall Street.
The overall bullish thesis on pot stocks is that the use of cannabis has far more to it than just its recreational use. Yes, the demand there is solid and is sure to grow as more states legalize the stuff. But there are bigger markets just waiting for the opportunity to become more mainstream.
For example the edibles market already exists and is growing in legal states. But the more exciting one is the potables. This is likely what attracted STZ to the sector. The consensus is that cannabis drinks will disrupt the soda, beer and spirits industries.
Other mega-cap beverage companies are actively seeking similar opportunities in pot ventures. But there is a giant kink in this effort. Marijuana is still federally illegal in the United States, so not many will commit the cash until that changes. After all, dealing with the stuff across state lines would be breaking the law.
Still, Altria (NYSE:MO) invested almost $1.8 billion dollars into Cronos so it’s only a matter of time before more mainstream companies own cannabis businesses.
Meanwhile, I consider CGC to be the king of all marijuana stocks, much like Apple (NASDAQ:AAPL) is to most tech stocks. They have a good model, proven management and a strong balance sheet, so they can execute on plans.
The fundamentals behind running a successful cannabis company rely heavily on deliveries. In other words, they can sell as much of the stuff as they can produce, so it becomes a race to capacity. It doesn’t take a marketing genius to promote a popular substance.
This is a long way of saying that the future for Canopy Growth is almost a sure thing. But as simple as this sounds, the hurdles are still gigantic, which is probably why investing in these stocks is still so risky. It is a bet on the concept of cannabis adoption into mainstream use.
This very uncertainty makes it almost impossible to short Canopy Growth stock with conviction. Because in addition to the general-use applications, there is a giant world of health aspects for cannabis and derivatives like CBD. Drug companies have been experimenting with it for years, so the applications there are likely to grow exponentially.
Moreover, there are the rampant and often unsubstantiated claims of cure-all healing powers that are driving hundreds if not thousands of new products. In California, I can’t escape the marketing push for cannabis in its many forms. I get inundated from the supermarket to the gym. It will take regulators years to sift through the fake stuff from the real so this is mania will linger.
Nevertheless over all the bullish thesis on cannabis stocks like CGC is legitimate. These are innovators trying to establish a legitimate business from scratch and they have to fight the law to do it.
So there are two ways dealing with CGC stock. The first is to plug ones nose and buy it for the long term. I did this with Uber (NYSE:UBER) and I don’t plan on looking at it for years.
The second way is to be more tactical and snipe shorter-term entries and exits points based on the chart patterns. But this morning’s drop makes this effort futile. It is big enough to make it worth a fundamental and a tactical entry at the same time. There is support through the $32 per share area.
In summary, as frothy as valuations are for companies like Canopy, the upside opportunity is undeniable. The math doesn’t make sense at this point in time, but the concept does.