The cannabis sector has been struggling — that’s no secret to those that follow along with the space. But with key companies like Tilray (NASDAQ:TLRY) and Canopy Growth (NYSE:CGC) reporting earnings this week, even more attention is being thrust onto the group.
We outlined a few of the key spots for TLRY stock ahead of earnings — some upside targets should the post-earnings reaction be positive and some downside targets if the stock is under pressure. It’s only fair to do the same thing for Canopy Growth stock, given the volatile nature of this industry.
Because of the regulatory hurdles, speculative nature of M&A, incredible growth rates and high valuations, cannabis stocks are volatile bunch. That’s not just TLRY and CGC either. That goes for names like Cronos Group (NASDAQ:CRON), Aphria (NYSE:APHA), Aurora Cannabis (NYSE:ACB) and others.
Let’s look at the charts.
Trading CGC Stock
Click to EnlargeJust over a month ago, we flagged the bearish price action in Canopy Growth stock price. Shares were setting up in a descending triangle, a bearish development where downtrend resistance is squeezing the stock price against a static level of support. For CGC, you can see that in the above chart.
Downtrend resistance (blue line) has been squeezing CGC lower since May. However, $38 support (black line) continued to buoy the name.
These setups are attractive in the sense that, once we get a break, we know which direction has the new path of least resistance. For the record, CGC wasn’t the only cannabis stock tipping its bearish hand.
In any regard, where does that leave us now?
Shares rallied on Tuesday, but CGC was swiftly batted down from the 20-day moving average. It was rallying alongside TLRY ahead of the latter’s quarterly results. Now back down toward $32, Canopy Growth stock is near a key level.
When the markets were in “selloff mode” at the start of August, CGC found support at $31. Should CGC close below this mark, it puts the $28 level on the table, as well as the year-to-date low at $26.30.
On the upside, CGC stock needs to clear the 20-day moving average and downtrend resistance (blue line). If it does, it can begin to work on a new uptrend line. It will also put the 50-day moving as its first upside target, with the 61.8% retracement at $37.75 as the second target.
At the very least, staying north of $31 would give the bulls some reprieve and allow CGC to start working on a series of higher lows.
Canopy Growth Stock Earnings Preview
Without question, CGC is considered one of the “blue chips” of cannabis stocks. A big part of that came after a large investment from a well-known company. Constellation Brands (NYSE:STZ) poured some $4 billion into Canopy, forging its balance sheet as one of the strongest in the group.
The cash infusion gave CGC a treasure chest to gobble up smaller, strategic entities in the space. But beyond that, it also put on a display of confidence. STZ is well-run outfit, and if it’s investing billions into Canopy, management is obviously bullish on its prospects.
That said, CGC is going through a bit of a rough patch at the moment. Will earnings turn its woes around?
When the company reports its first quarter results for fiscal 2020, analysts expect sales of $84.2 million (CAD). For the year, estimates call for roughly $540 million in sales. They still expect CGC to lose 31 cents per share this quarter and $1.06 per share this year. In fiscal 2021, estimates call for almost $1 billion in sales. Progress toward this figure will be in close focus.
If Canopy continues to make progress, then the post-earnings reaction may be favorable. If investors feel that that sales figure is less likely to be achieved, it may lead to selling. Adding volatility in the broader market may not help CGC — or other cannabis plays — in the short term.
What matters is the trend and the strength of the balance sheet. Are more countries and states legalizing cannabis? Are they companies working toward positive free cash flow and have enough cash to comfortably cover their costs? Can revenue growth keep pace?
That’s what investors want answers to. Basically, they want to know that the long-term trends remain in place, helping to justify some of these huge valuations.