Canopy Growth (NYSE:CGC) looked like it was about to turn the corner. Shares were rallying nicely off its lows and CGC stock was moving well to start 2020.
In fact, a number of cannabis stocks were trading better to start the year. There were a few that weren’t rallying, and those were certainly ones to avoid. When CGC stock was moving nicely, we said it was a speculative position we were willing to hold, provided support remained in place.
However, a concerning trend has developed. Even as the broader market continues to climb to new highs, CGC stock is failing to do so. That’s relative weakness and it’s not something we like to see if we’re looking for a long position. While up following better-than-expected earnings, it’s struggling to maintain any upside traction. It’s not panic time, but there are some concerns regarding the price action.
Breaking Down Canopy Growth
Is it possible that after such a large rally to start 2020, that CGC stock is simply taking a break? Yes, that’s possible. But if this is how it’s acting now amid a bevy of market-wide buyers, how will it behave when those buyers turn to sellers?
Furthermore, let’s not pretend that this is a blue-chip company like say Microsoft (NASDAQ:MSFT), a name that galloped higher into the summer and traded sideways for several months before breaking out and cruising to new all-time highs.
In fact, CGC stock is just the opposite. Its volatile existence became even more pronounced when shares plunged from more than $40 in June to less than $15 in November. Yes, it’s volatile. But is there opportunity?
As the U.S. and other parts of the world creep toward legalizing cannabis products both for medicinal and recreational use, sales continue to climb too. But to survive, a company needs scale and until it gets there, it can be burdened with losses. Many names in the space need time to get to profitability, something CGC stock has — for now.
With $2.7 billion in cash, and with $3.56 billion in current assets to just $425,800 in current liabilities, CGC stock should be able to survive for a while. As its new management team settles in and with Constellation Brands (NYSE:STZ) owning a large chunk of stock, many are right to pick this speculative play for a 2020 rebound in cannabis stocks.
However, buying Canopy Growth blindly and hoping that the stock price recovers is a fool’s errand. Improper risk/reward and a lack of discipline is exactly what trapped investors in CGC stock who bought it at $40 or $30, thinking it couldn’t get any cheaper, only to see it eventually bottom at $13.81.
Trading CGC Stock
CGC stock is far from a lay-up down here. For all we know, the bottom will fall out again just like it did in November, as shares decline to new lows. The latest action looks similar to December, where shares pop, trend lower, then pop again to new recent highs.
Click to Enlarge
I would have felt a lot better about that pattern had CGC stock not broken below all its major moving averages over the past few trading sessions. After flirting with a failure to hold short-term uptrend support (blue line), shares gapped higher above all these measures in its post-earnings action.
Below its major moving averages and uptrend support would be a negative development, especially after positive post-earnings action. But ultimately, longs can remain in this speculative play as long as CGC stock is above $17.50.
Just know when to pull the plug. Lacking the discipline to do so is what turns a $2 per share loss into an $7 per share loss, a roughly 35% decline from current levels. From here, I’d like to see Canopy Growth clear its post-earnings high, putting $26 back on the table. Above $26 resistance and the $28 to $30 zone are possible upside targets.
The bottom line: CGC is a respectable speculative play with upside potential. However, it does not deserve (nor does it have) the benefit of the doubt. If the technicals break, I’m out.
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.
