On Friday Nov. 8, Canopy Growth (NYSE:CGC) stock made a significant move, ending higher by 12.5%. The rally put a potential breakout over downtrend resistance on the table for CGC stock. While it feels early to make the call, it’s possible that Canopy Growth stock may have bottomed.
At least, bottomed in the short term. Remember, cannabis stocks can be very volatile, moving up or down in significant fashion. At times, these moves can come on no news at all.
Through thick and thin, Canopy Growth stock has been considered one of the blue-chip marijuana stocks to watch. After a $4 billion investment for a 40% stake from Constellation Brands (NYSE:STZ), this company became the most well-financed cannabis name on the block.
Not All Is Well for CGC Stock, Though
That said, not everything is going Canopy Growth’s way. Forget for a moment that CGC stock is down huge from its high — falling 66% from its peak in May to its trough just the other day.
This company has also struggled massively with its own c-suite.
Back in July, there was apparently a strategy clash between Canopy Growth and Constellation Brands. It resulted with the ouster of Canopy’s co-CEO Bruce Linton. That left Mark Zekulin as the sole CEO of Canopy Growth, although he said he would look to step down once a replacement was found. To few people’s surprise, Constellation Brands reportedly tried to gain more influence over CGC.
Investors can look at this as good or bad, honestly. On the downside, Canopy Growth had gained a lot of traction under the current management team. That said, it opens the door for STZ to put its top picks in charge at the company. As readers may know, Constellation Brands is considered by many to be a pretty well-run outfit.
It looks like those plans are underway, too. About a month ago, David Klein was named chairman of CGC stock. Klein is the current CFO and executive VP of STZ.
Of course, it doesn’t make investors feel much better when a company misses on earnings and revenue expectations, which is what Canopy did when it reported in August.
Trading Canopy Growth Stock
Here’s the thing. When a company (or in this case, an entire industry) can’t be traded on its fundamentals, its technicals take a dominant role in deciding the direction of the stock price. Sentiment is a massive driver, as is momentum.
In the case of CGC stock — and cannabis stocks in general — they do not have the financials or valuation to justify the stock price.
That’s unlike a company like Microsoft (NASDAQ:MSFT) or McDonald’s (NYSE:MCD). While technicals, sentiment and momentum can drive these names at times, so too do the underlying fundamentals. At some point on large selloffs, investors look these stocks over, consider their valuations, dividends, and profits, and decide it’s a buy.
For a stock like CGC, we’re talking about a massive valuation — trading with a market cap of $7 billion — but lack the financials to back it up. For instance, it had sales of $67 million last quarter.
While this stock still has a monumental amount of overhead resistance in play, two key developments have occurred. First, the stock has put in a double bottom just under $19 per share.
It’s 100% possible that this bottom ends up breaking down, but seeing it hold up over the past month has been encouraging. Second, shares pushed through downtrend resistance (blue line), potentially cementing that bottom in place.
CGC stock has declining moving averages, Fibonacci retracements overhead and numerous other obstacles. But it’s clearing a big resistance mark and putting in a potential bottom. Speculative bulls could consider a long position so long as Canopy Growth stock is over the October low.
If investors are going to speculate on cannabis stocks, Canopy Growth is one of the better ones. That doesn’t mean it’s without risk — it most certainly is — but for the first time in a long time, the technicals are starting line up in bulls’ favor.
Below $17.89 and that theory changes. But for now, it may be OK on the long side. On the plus side, CGC has one of the strongest balance sheets in the industry. $3.1 billion in cash and short-term investments outweigh current liabilities of $373 million. Total assets of $8.6 billion hammer total liabilities of $2.7 billion.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.