Volatility in the stock market is through the roof, which means that most equities are suffering tremendously. So it wasn’t a surprise to see Canopy Growth (NYSE:CGC) stock fall 7% on Tuesday. This came on top of the fact that it was already 70% off its highs. So cheap can definitely get cheaper. Trying to catch falling stable stocks in such trepidation is tricky enough. Doing it with a volatile cannabis stock is the equivalent of doing a high wire act without a net.
So there is immediate risk for as long as this market-wide selloff persists. The coronavirus from China is no longer contained to China. The globe is freaking out over it and businesses are suffering. Regardless of its death rate, it will have a tangible negative effect on the company profit and loss statements.
CGC stock will move with the markets in addition to its own set of headlines. In this case, the markets add to its problems since the sellers have been in control of it for a while.
Don’t shoot the messenger for saying this — my comment is strictly based on the price action. I’ve shared more bullish setups than bearish ones on it, so I am not a perma-bear to Canopy or the pot stock sector as a whole. The fundamentals have not deteriorated since the stock spiked on the earnings report but the price has. There have been c-suite moves that shook investors out, but in due time they will find footing.
Meanwhile, Canopy remains most likely a winner in a young industry. It is important to remember that cannabis is still illegal in the U.S., so that is a massive headwind in addition to all other operational challenges. Pot stocks like Canopy, Aphria (NYSE:APHA) and GW Pharmaceuticals (NASDAQ:GWPH) are trail blazers trying to set the path that many more will follow.
Define the CGC Stock Thesis to Win
Some of these starters won’t make it, so it’s best to bet on the ones with the strong balance sheets. Canopy is the one that received a giant cash infusion from Constellation Brands (NYSE:STZ). I last wrote about it in mid-December, and it delivered a 25% rally before it gave it all back. It did subsequently make another rally … that also faded and then some. Clearly the opportunity to trade it short-term is rewarding for those who can stomach the action.
So the first decision that new investors have to make involves time frames. It is crucial to define the entry as a short term trade or an investment for the long term.
When I develop a thesis that supports going long a stock, I usually don’t worry about finding perfect entries. I also don’t fret over every red tick for as long as my thesis is still correct. Meaning if management doesn’t give me reason to doubt my assumptions, I stick with the investment and manage the risk over time.
In this case, valuation is not a parameter I consider because the whole sector is way too expensive from the traditional sense. However, there is nothing traditional about these pot stocks, so I leave that metric at the door.
Trading Short Term Can Be Rewarding
Since the highs of 2018, the stock has been selling off without reprieve. The week of the November earnings was so horrendous that it served as a great tradable bottom. Now it’s coming under fire again. Clearly the short-term volatility opens the door for big swings, even overnight. Those are tradable events … but only for the right investors. It is impossible to win short-term without knowing a few things about charts. This one has clues that can suggest entry points, support and resistance lines.
Specifically, the low that it set in November should hold. Since then, buyers have stepped in at or around $17 per share, which is where it was on Tuesday’s close. If the sellers can break through it then they could target $15.40. If that happens it would make for a good entry point to bet that the November lows will again be a floor. Which entry to pick depends on individual risk tolerances and preferences. There are more upside triggers which I will draw on the chart but it is best to take the trades one line at a time to reduce potential mistakes.
Conversely, the chart also suggests that near $19.80 Canopy will find a resistance zone. I know the fans never want to talk about selling points, but this stock’s technical cues have served us well in the past so we should trust them. The trick is to separate the trade from the investment and never turn the first into the second.
The overall thesis for cannabis is valid. There are so many people who believe in it that it’s impossible to kill the concept. Patience is key and execution is vital, so it is important to bet on the right horse.