For a while last year, pot stocks like Canopy Growth (NYSE:CGC) were all the rage on Wall Street. Everybody wanted to own CGC stock and its competitors. I couldn’t avoid talking about it, not even at the gym.
But lately, Canopy Growth seems to have fallen off a cliff and it cannot find support.
That’s the risk of being a momentum stock like CGC: When things are going well, CGC stock is on a rocket ship to the moon. Conversely, when things go sour and they fall out of grace they plummet into an abyss. This makes it very difficult to trade.
This is why homework is important and fundamentals have to be part of the thesis. The good news for CGC stock is that it has fallen into a pivotal support zone.
When it comes to cannabis stocks, CGC is the cream of the crop at least this is what perception is for most sector investors. This is perhaps due to the fact that Constellation Brands (NYSE:STZ) invested more than $4 billion into the CGC. This served as a due diligence by proxy to most retail investors who may or may not have as good of an insight into the cannabis industry but still want to participate in it.
This year, new issues like Beyond Meat (NASDAQ:BYND) and unicorns like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) stole the pot stock thunder. So in essence, we have had a flood of speculative bets competing with cannabis stocks for the same pool of money.
While this makes bounces and Canopy Growth stock harder to come by, this does not mean that the story is over.
CGC Stock Is a Buy at Support
The cannabis industry is still a viable bet for the future. There is just too much love for and interest in it that it will take a lot more than a few dim trading months to reverse it. CGC stock ranks at the top of that list of stocks to own.
Most mega consumer companies are still interested in entering it if not for the legal hurdles. Perhaps most are still waiting for the United States to legalize cannabis on the federal level. So far, it has been only states that have legalized marijuana, but the trend is growing. Once the regulatory hurdles fall, the pot stocks fundamentals will change drastically.
Therein lies a put below pot stock prices themselves. Meaning they have already shed a lot of their initial froth. And for them to fall much lower will take headline setbacks that are not yet on the docket.
Moreover, the cannabis thesis has a wide scope of applications. So it is near impossible to kill it altogether right here. Beverage companies like Coca-Cola (NYSE:KO) and Pepsi (NASDAQ:PEP) are itching to launch a cannabis-based drink; beauty companies want to sell creams with CBD; food companies want to offer edibles right off of the supermarket shelves.
This is not to mention the huge array of medical applications.
The potential is vast and the problem for Canopy Growth stock now is whether the company can deliver on its promises. It needs to step up like Aphria (NYSE:APHA) just did and deliver a good report. So far, the whole cohort like Aurora Cannabis (NYSE:ACB) and Cronos (NASDAQ:CRON) have been given a pass on that front, but they need to start filling the gaps between expectations and realities.
Specifically, pot stocks need to show more production capacity. They cannot make enough of the stuff to satisfy the current demand let alone growth. When that happens, it’s then only a matter of time before they align their operations to satisfy the demand and thereby grow into their valuations.
Speaking of valuations … they are insane. There is no way to justify the current metrics of CGC stock selling at a 66 times its sales while losing $2 per share. But it is important to note that these are intrepid stocks trying to legitimize an industry that didn’t even exist just a few months ago on Wall Street. So they are supposed to spend a lot in the beginning. It is important to not discount the potential in them just because of profitability.
Nevertheless, these are risky stocks and I would consider going long CGC or any other cannabis stock a speculative bet at best. Sizing of any trades in them should be small enough to not break the piggy bank. This also leaves room for adding at lower prices if the need arises.
In addition, the stock market in general is still reeling from that huge shake up in the economic war between the U.S. and China. So there’s unusual added risk from outside factors.
As always, when it comes to any stock, I suggest that you never invest more than you are willing to lose.