The stink of Canopy Growth’s (NYSE:CGC) earnings call and shares subsequently getting smoked has to be cause for concern going forward, right? Well, let’s take a look at the price chart for CGC stock before you rush to prune your portfolio and end up burning yourself.
Last week’s Q4 report from Canada’s largest cannabis producer was nothing short of ugly. Wider-than-expected and growing losses from the year ago period compounded with disappointing revenues isn’t the sort of announcement Canopy Growth needed. At least not given the circumstances.
The fact is shares had in fact gained 144% in front of the report since bottoming back in the second half of March on the heels of the market swoon. But ‘bad is bad’, right? The other fact is Canopy did deliver a report where remaining upbeat about CGC stock would likely challenge even the most ardent cannabis bulls.
And if the actual lousy numbers for the fourth quarter weren’t enough, Canopy’s management decision to withdraw guidance for 2020 and telling investors it now sees 2021 as a “transition year” was the proverbial straw that broke the camel’s back.
The immediate aftermath saw shares of Canopy tumble more than 20%, a clear testament that investors heard to what management had to say and weren’t content to stand idly by. Also among those taking action is Stifel analyst Andrew Carter. Carter reversed the firm’s “buy” recommendation to a “sell” rating, citing the challenging road ahead to eventual profitability long-term and more immediately, elevated expenses and a lack of catalysts to drive enthusiasm in the near-term future.
The Monthly Price Chart for CGC Stock
Source: Charts by TradingView
As bad as earnings were and as strong as the backlash by Wall Street has proven, Canopy remains a potential turnaround story that’s still well-funded due to its partnership with Constellation Brands (NYSE:STZ). True, the company’s progress towards righting itself has become even less certain right now. However, the price chart continues to reflect a larger and meaningful bottoming pattern that’s potentially in the works.
Over the past three years since Canopy first caught the attention of investors, the stock’s volatile rallies and deeper corrective price plunges have worked to establish a large Fibonacci-based formation in the spirit of what’s known as a Gartley pattern. This pattern takes on the shape of two triangular ‘wings’ as the provided monthly chart illustrates. And when the Gartley pattern completes at Point D, it’s historically a sign that a new bullish cycle can emerge.
There’s no guarantees of course. And already the Gartley in CGC has failed once. An initial doji bottoming candle last November, confirmed the following month, ultimately failed. That being said, as often it’s those second and sometimes third chances which prove to be the real deal after most investors have thrown in the towel.
The second “buy” signal was confirmed in May, as shares rallied to take out the high of the March hammer candle. A gain of 16% followed in just a handful of days leading into Canopy’s earnings report. The subsequent reaction put the “buy” signal underwater, but the pattern remains intact.
The Bottom Line on Canopy Growth Stock
With a modest bullish divergence reflected in Canopy’s monthly stochastics, as well as extreme pessimism towards shares (though not so much as to fail the Gartley), I’m still upbeat on Canopy’s potential for higher prices yet.
Bottom line, I would wait to buy shares above $19 or until a pullback confirmation from the weekly chart is in place. From there, a 12% to 15% stop or married put is highly recommended to protect the position. But if we’re right and the pattern continues to hold, I’d still estimate a near doubling ahead and a price target of $30 to $31 looks possible by years end or early next year.
Disclosure: 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.
