In a stock market getting smoked, is Canopy Growth (NYSE:CGC) a better buy, sell or hold? Let’s take a look at recent events in CGC stock to reach a stronger, risk-adjusted position on shares.
Is the bottom in? When it comes to the last few session’s broader risk-off environment, it’s too soon to tell if Tuesday’s attempt by bargain-hunting investors will turn into something more durable. Sure, palpable coronavirus-driven selling pressure has helped erase the Dow Jones Industrial Average’s gains for 2020 as of Monday’s closing bell. And the CBOE Volatility Index (VIX) has reached its highest readings in 13 months. But is it enough?
Today’s opportunity to buy into the market isn’t some kind of fantastic gift. Furthermore, both the selloff and the spike in bearish sentiment aren’t extreme in the context of historical market corrections which have led to durable bottoms. CGC stock is different, though.
Canopy Growth is one name amid the selling pressure where optimism for a turnaround should be deservedly stronger. The fact is Canopy investors were exhaling sure sighs of relief following mid-February’s earnings release. And the gains of more than 13% in shares immediately following the results weren’t without good reason either.
The quarterly report from Canada’s largest cannabis producer featured top- and bottom-line beats, strong revenue growth and improving product margins. Nice, right? But there’s more. Canopy also ended 2019 with 2.3 billion CAD in cash — what Fast Money co-host Tim Seymour called “a king’s ransom” within the industry.
Lastly, compared to 2019’s crowning performance in the broader market, let’s just say Canopy’s loss of around 22% is obviously less correlated. Shares have put in the necessary work for today’s investors to get excited.
CGC Stock Price Monthly Chart
CGC’s slide in shareholder value over the past year was a difficult one. And since hitting an all-time-high in October 2018, the price action has been even more punishing. The monthly view of Canopy Growth shown above is evidence enough. But this same big picture also strongly suggests shares are in position to rally.
Over the past couple years — starting right after Canopy Growth first caught Wall Street’s attention — the stock’s volatile rallies and subsequent plunges have put together many of the elements of a Fibonacci and pattern-based Gartley pattern. The formation looks like two wings as illustrated in the provided price chart. And it’s bullish.
How to Trade Canopy Growth
Historically, when this formation completes at point D, it’s likely that a new bullish market cycle will begin. And CGC stock confirmed a Gartley-like setup in December and stochastics are bullishly positioned in oversold territory. With those facts in mind, the technical case for buying shares today looks compelling.
To be clear, I’m not promising Canopy Growth will go on to become the next Apple (NASDAQ:AAPL) or even a Starbucks (NASDAQ:SBUX). However, I’d project the rally out of this pattern could reasonably allow shares to find their way between $29 and $33 in 2020.
Market-Maker Edge: It’s important to appreciate Canopy’s higher price volatility and acknowledge that the marijuana market leader is still no Apple. But with that in mind, my advice is to buy a limited and reduced risk, out-of-the-money bull call spread. Such a spread also allows for potentially huge profit leverage. One of my favored spreads of this type is the July $22.50/$30 call combination priced for $1 with CGC stock at $19.85.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies and related musings, follow Chris on Twitter @Options_CAT and StockTwits.