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Investors Should Not Trust the Rally in Canopy Growth Stock (Yet)

CGC stock remains below its 50-day moving average despite its recent rally

Canopy Growth (NYSE:CGC) stock has rallied by about 21% since hitting a low in mid-October. The Smiths Falls, Ontario-based cannabis company had suffered a considerable equity decline over the summer like many in its industry. From peak to trough, CGC stock lost about two-thirds of its value.

Despite a momentum surge, don't believe the Canopy Growth stock rally just yet.
Source: Jarretera / Shutterstock.com

However, the recent uptick in Canopy Growth stock has some wondering whether the pain has ended. Although shares could have begun a secular uptrend, investors should wait for more signals before buying into the rally.

CGC Remains (Comparatively) Strong

In early October, I urged investors to avoid CGC stock until it received a positive catalyst. Since reaching a low of $17.89 per share on Oct. 14, the equity has steadily climbed higher. Today, Canopy Growth stock trades at about $22 per share. In fairness, Aurora Cannabis (NYSE:ACB), Cronos Group (NASDAQ:CRON), and Tilray (NASDAQ:TLRY) saw similar chart trends, albeit with a less dramatic recovery.

Still, our own Chris Markoch says the honeymoon is over for cannabis stocks. I see the honeymoon as ending, but I do not see it as done yet. Despite the significant drop in CGC stock, it still trades at about 34.5-times sales. This has certainly come down, but it remains a very elevated multiple.

Like many who watch the industry, I see CGC stock in a growth phase. After all, Wall Street predicts revenue of 563.56 million CAD ($431.76 million) this year (2020) and 1.08 billion CAD ($772.26 million) in fiscal 2021. This 91.3% revenue growth makes it easy to forgive continuing losses. With over $3 billion in cash thanks to the investment from Constellation Brands (NYSE:STZ), I expect CGC to maintain its industry leadership.

Its size and cash hoard insulate them from the troubles of the small players. Also, I also do not see problems like the ones Hexo (NYSE:HEXO), or worse, CannTrust (NYSE:CTST) face.

Why Traders Should Not Buy into the Rally

However, I do not think traders should buy into this rally for now. CGC remains below the 50-day moving average, which stands at around $24 per share as of the time of this writing. CGC will report its second-quarter 2020 earnings on Nov. 13. If Canopy Growth stock has not made it to $24 by then, the market’s reaction to the report could show whether or not the rally will hold.

Unfortunately, history bodes poorly for CGC stock in that regard. The company has missed earnings estimates in each of the previous eight reports. Moreover, the smallest miss was 22 cents CAD per share. The largest fell short by 3.33 CAD per share. This occurred in the last quarter when the company logged a huge non-cash charge. Either way, the company tends to not even come close to Wall Street forecasts.

Moreover, earnings forecasts continue trending in the wrong direction. Loss estimates for the current year stood at 1.10 CAD (84 cents) per share three months ago. However, that forecast has fallen to 4.33 CAD ($3.32) per share. Although I expect traders to forgive losses for the time being, widening losses do not help the case for CGC.

Furthermore, the aforementioned relationship with Constellation has also brought turmoil with it. Constellation has caused short-term uncertainty in CGC by instituting a “non-takeover takeover.”

What I mean by that is they have not sought (at least so far) to formally absorb Canopy Growth into Constellation. However, they pushed out founder and former CEO Bruce Linton in July. More recently, Canopy appointed a new chairman of the board. I do not think it surprised many that the new chairman is Constellation executive vice president and CFO David Klein.

With so much uncertainty remaining, I think investors need more time to figure out how these changes impact CGC stock. Still, without more certainty on the price, earnings, and management front, investors should stay on the sidelines.

The Bottom Line on Canopy Growth Stock

Investors should wait before buying the uptrend in CGC stock. After the brutal decline over the summer, the rally in Canopy Growth stock has given CGC traders hope for recovery.

Unfortunately for Canopy Growth bulls, a great deal of doubt remains. For one, the uptick has not yet taken the equity above the 50-day moving average. Secondly, earnings estimates continue to fall. Traders will also receive a reminder of these challenges thanks to an upcoming earnings report in mid-November.

With earnings misses in the previous eight reports, investors have little hope that the quarterly report will help CGC stock. Constellation’s de facto takeover of the company has also brought uncertainty to the C-suite.

These factors, along with a high price-to-sales ratio, does not bode well for CGC’s short-term prospects. Canopy Growth continues to lead the industry. Like many, I believe in the company’s long-term future. However, without further confirmation that the rally can continue, I do not recommend buying Canopy Growth stock at this time.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/investors-should-not-trust-cgc-stock-yet/.

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