Although it appeared 2019 would be a banner year for Canopy Growth (NYSE:CGC) stock and its peers, it was anything but that. Instead, many of those companies nose-dived after a hot first quarter.
After a market-wide thumping in the fourth quarter of 2018, equities were in “rally mode” to start the year. While many stock were able to hold up throughout the year, marijuana stocks were not among them. Once they began to break through key support zones in the summer, the group began to cascade lower, finally hitting a low in November.
The question now — and really the key for this group — is whether the recent low will hold or if there’s another leg down still to come. Regardless, many investors have begun to buy marijuana stocks, including Canopy Growth stock, that have been beaten down.
Observations on Cannabis Stocks
Anytime an investor sees the bulk of an industry’s stocks tumble 50% to 70%-plus, it’s a bit jarring. Despite the recent rally, CGC stock is still down over 60% from its 12-month high, and it’s down about 64% from its all-time high.
That’s not a good look, but it’s not the only marijuana stock that’s down tremendously from its all-time high. Among those in the same boat are Aphria (NYSE:APHA), Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY), Cronos (NASDAQ:CRON) and Hexo (NYSE:HEXO).
In fact, nearly every one of those names is down more than 70% from their highs — and Tilray stock has tumbled an extreme 91%. So in a way, CGC stock’s decline of “just” 63% doesn’t look as bad. Over the past year, the three best performers of the group are APHA, down 10%, CGC stock, which is down 30%, and Cronos, down 40%.
These companies have the strongest financials in the group.
Evaluating Canopy Growth Stock
Canopy’s last few quarterly reports have been anything but dazzling. A confusing warrant situation with Constellation Brands (NYSE:STZ) was not handled well by Canopy’s management, while its top executives remain in a tumultuous state. A week ago, the company finally hired a new CEO, something bulls hope will get CGC stock back on track in 2020.
Despite triple-digit revenue growth, Canopy keeps striking out on earnings. The company has missed analysts’ average earnings and revenue expectations for the last two quarters.
While Canopy’s balance sheet should give it staying power, its cash burn and inability to beat expectations is concerning and disappointing. As of year-end 2018, CGC had 4.1 billion CAD in cash and equivalents, as well as current assets of 5.27 billion CAD.
As of the most recent reported quarter, those balances have been cut to 1.1 billion CAD and 3.58 billion, respectively. That doesn’t tell the whole story, of course — its total assets declined from 8.64 billion CAD to 8.225 billion CAD — but it does highlight some concerns about its performance over the last few quarters.
Trading Canopy Growth Stock
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Despite some of the negative developments around CGC’s earnings and the industry’s performance, the company has some positive attributes too. For one, Canopy Growth stock is showing signs that it wants to bottom.
Investors could clearly see the panic of some owners of CGC stock last month. Canopy Growth stock went from $21.20 to $13.81 in just a few days.
CGC stock has since recovered from those lows, while the shares are trying to push through resistance and some of their short-term moving averages are turning higher. Further, the shares have pushed through various downtrend resistance levels.
Specifically, Canopy Growth stock has hurdled trend resistance (depicted by the blue line) and the 50-day moving average. Both had been weighing on CGC stock for months.
Canopy Growth stock is now contending with the $22.50 level. A close above it would put a larger rebound on the table, with bulls inevitably looking for a retest of the 200-day moving average and a gap fill up to the $31 to $32 area.
So can CGC double in 2020? Sadly, even if it can, the stock still won’t take out its 2019 highs. From its lows, a double would take Canopy Growth stock to just $27.62.
I’m looking to see if marijuana stocks can find some upside momentum in 2020. Ideally, Canopy stock will not drop back below $17.50. If it does, though, it’s vital for the shares to avoid making new lows.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long APHA.
