Seasoned investors know there are at least two types of rallies a security can experience: the credible kind and the infamous dead cat bounce. A dead cat bounce is everything the name implies: a rally in a security that’s imperiled, troubled or worse. The upside quickly evaporates before the next leg lower.
Defining that kind of rally isn’t the hard part. Identifying that bounce … that’s the hard part. With that in mind, the cannabis space is still a potential minefield and that includes Canopy Growth (NYSE:CGC). Canopy Growth stock, like many of its cannabis brethren, rallied in recent days.
Ahead of Thanksgiving week, the shares traded at four and five times typical daily volume, pushing the price as has as $21.56 a piece. Things settled down ahead of the holiday, with trading falling to normal — 6 million-share neighborhood — and the CGC stock price slipping accordingly, closing Friday at $18.59.
A point I’ve seen made a lot recently about cannabis equities, perhaps you’ve seen it, too, is that this year’s environment for marijuana stocks is similar to the 1999-2000 tech bubble where the market essentially separated the cream from the rest of the crop among internet and technology stocks.
Those old enough to remember, and I’m in that group, recall what would eventually become a graveyard of internet companies, occupied by the likes of E Toys. Obviously, we know that E Toys isn’t around today, but Amazon (NASDAQ:AMZN) is and it’s one of the largest companies in the world.
Point is, markets do this, particularly with new or next-generation growth industries, of which cannabis fits the bill today. Making matters difficult with regards to Canopy Growth stock and its peers over the near term is that the weeding out process (no pun intended) is probably still in its early stages.
Assessing Rally’s Credibility
Admittedly, it’s hard to ignore the recent pop in Canopy Growth stock. An investor who entered the name in mid November is undoubtedly happy and a 19.3% gain does help reduce the sting of some of the losses delivered by the name earlier this year.
One day doesn’t make or break a trend, but it is noteworthy that shares of Canopy lost less than 2% on Nov. 26, a day after the Food & Drug Administration (FDA) warned about the effects of cannabidiol, or CBD.
“The FDA said that based on a lack of scientific information, the regulator cannot conclude that CBD is ‘generally recognized as safe among qualified experts for use in human and animal food,’” reported MarketWatch.
In the context of its broader rally, Canopy Growth stock falling less than 2% on that news is arguably encouraging. Remember that on the same day, Aurora Cannabis (NYSE:ACB) executed a dilutive convertible bond offering that punished its stock as well as the broader marijuana space, explaining some of the downside for CGC on that day.
Just a day prior to the Aurora news, Canopy announced that it received approval from Canadian regulators for its massive beverage facility in Ontario.
“The new facility is operational and will begin producing cannabis-infused beverages today,” according to the company. “The beverage facility adds to the complement of cannabis production facilities in Smiths Falls including a regional distribution center with automated excise stamp lines, an automated manufacturing facility, a state-of-the-art bean-to-bar chocolate factory, and a first-of-its-kind Visitors Centre.”
Cannabis-infused beverages represent significant growth potential for Canopy and other companies entering this arena. Last year, that market was valued at about $174 million, but it’s expected to swell to $2.05 billion by 2026.
Expanded product offerings in Canada are potentially significant for Canopy Growth stock because that country still accounts for 80% to 90% of the company’s sales.
Bottom Line on Canopy Growth Stock
For now it appears that Canopy Growth stock will be one of the survivors in the cannabis market’s weeding out process. How the shares look after the market has rendered its verdict, well, that’s another matter. However, Canopy could go a long way toward shoring up its future and that of CGC stock investors if it can solidify expansion beyond Canada.
“Canopy also exports medical cannabis globally. The global market looks lucrative, given higher realized prices and growing acceptance of cannabis’ medical benefits,” said Morningstar in a recent note. “Exporters must pass strict regulations to enter markets, protecting early entrants like Canopy. Partially offsetting the global markets’ potential for Canadian producers are threats of future production from countries with cheaper labor—the single largest cost. Canopy’s efforts to expand production into countries like Colombia and Lesotho should offset its cost-disadvantaged Canadian production. We forecast around 20% average annual growth through 2030.”
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.