Canopy Growth (NYSE:CGC) is up 35% from its November lows. Based on that data point alone, some investors may glean that the stock is doing quite well. Because most investors know how bad cannabis stocks have been though, they realize that’s not the case.
In fact, it’s far from reality — and not just for Canopy either. The entire cannabis industry has been under extreme pressure in 2019. That’s too bad too, because the group started off the year so strong.
Many of the stocks doubled from their December and January lows. But they used up too much energy in the first quarter, topping out and steadily declining for several months. In the summer, the bottom really started to fall out, as Canopy Growth began to severely break down.
Bulls are hoping the bottom is in. If that’s the case, that low came in November. After a rebound in December, we need to see key support hold in order to trust this name on the long side.
Trading Canopy Growth
A look at a chart of Canopy Growth reveals just what we are talking about: intensely, painful selling.
However, in November, shares were flushed lower, bottoming at $13.81 and quickly spiking higher. It prompted us to ask earlier this month whether shares could go on to double in 2020. Even doing so from current levels wouldn’t take out Canopy’s high from 2019.
Still, it’s certainly possible that Canopy Growth and the rest of the cannabis space could enjoy a big 2020. That is, if certainly catalysts come into play and if the technicals continue to improve. In order for the latter to happen, Canopy must hold a very critical level of support.
That mark comes into play near $17.50.
After hitting rock bottom, Canopy surged to $21.56 in just three trading days. Shares were rejected from the 50-day moving average and downtrend resistance. However, on the pullback, $17.50 held as support. In early December, the stock ended up pushing through downtrend resistance, as well as the 20-day and 50-day moving averages.
The stock has been slowly churning lower since that action. Fund managers likely don’t want it on their year-end books, while investors with large losses have likely been tax-harvesting those losses.
As we near 2020 though, Canopy may be able to turn a new page. While breaking out over downtrend resistance doesn’t guarantee gains will come, it’s certainly a shift in the bulls’ favor.
Let’s see if the stock can maintain above $17.50. If it can’t, the $13.81 low is back on the table. If it can maintain above it, then it can reclaim its 50-day moving average. Above it and $22.50 is possible. Over that mark and the $27.50 and 200-day moving average is on the table.
However, it all starts with support holding first.
Investing in Canopy Growth
Is Canopy Growth a good investment for 2020?
It’s a reasonable speculative holding for 2020, provided investors do not allocate too large of position to the name and are disciplined enough to lock-in losses while they are manageable vs. holding and praying if support blows out.
Canopy is a reasonably speculative play because it has one of the better balance sheets in the industry. That’s also why I like Aphria (NYSE:APHA) going into 2020 as well.
Others do not command such a solid balance sheet, like Tilray (NASDAQ:TLRY) for example. Others, like Aurora Cannabis (NYSE:ACB) have very unattractive technicals.
Canopy and Aphria’s charts look better and the financials are stronger. That said, Canopy has had some mishaps.
A lack of clarity around a stock-warrant situation with Constellation Brands (NYSE:STZ), continually disappointing quarterly results and a big c-suite shake-up has deflated investor confidence. With a new CEO in place, investors are hopeful that the company can get back on track and find some consistency.
With legalization continuing to take place in the U.S. — Illinois, the sixth most populous state, begins on Jan. 1 — and deregulation occurring, the secular trend is in place for cannabis stocks.
Canopy Growth still has $2.73 billion in cash and short-term investments on hand, while current assets total $3.56 billion. While that’s down significantly from $4.9 billion and $5.27 billion, respectively, at year-end 2018, it still greatly outweighs liabilities. For instance, current liabilities total just $425 million.
Admittedly, Canopy has to get its quarter-to-quarter act together. But if it can do so and its technicals remain stable, shares can have an enjoyable 2020.
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.
