If someone asked my opinion about opening a business in a country that deems the activity illegal, I would call them crazy for even thinking about it. Yet, that is exactly what Canopy Growth (NYSE:CGC) and the rest of the cannabis cohort are doing now. The U.S. still considers marijuana illegal. Unlike the Federal government, Wall Street embraced the concept right away and CGC stock sky rocketed to its $59 per share peak in 2018. Alas, that did not last long and the fall from grace was painful.
From peak to trough, the stock dropped 85% and finally bottomed during the quarantine crash. Since then it has made higher-lows and is trying to breakthrough a thick zone of resistance around $20 per share.
And therein lies the opportunity. If this trend continues, CGC will eventually emerge out of muck to yield nice profits for patient investors.
CGC Stock and Its Cohorts Are Doing Some Heavy Lifting
What these cannabis companies have accomplished so far is extraordinary because they are operating in spite of tremendous legal walls. They not only have all the hurdles that other startups have, but a slew of special problems that the others don’t.
Simple concepts like interstate banking or mergers and acquisitions are a legal nightmare. Canopy Growth hit the mother lode when Constellation Brands (NYSE:STZ) invested $4 billions in it. This gave management the ability to execute on their plans much easier than others in the sector. Immediately thereafter, investment experts anointed CGC the default pot stock to own.
Having the blessing of Wall Street, one would think that trading CGC stock should be boring. Far from it. Just in the last month it has already experienced four separate 15% moves in each direction. Clearly this is not for the faint of heart but there is a way around this.
The thesis for the success of cannabis companies is long term. They will definitely need the help of legislators to get to the finish line. This is a topic that should gain momentum going into the November U.S. elections.
The Fundamental Metrics Are Murky
Fundamentally, they are doing all they can to succeed and impress investors but there isn’t tangible proof of this yet. For example, Canopy Growth price-to-sales is 20x, which is not cheap. Anyone buying the shares today is effectively fronting the company 20 years worth of sales for that privilege. I don’t mind them losing money, the concern is having too much hopium baked into the current price. At 20 it’s not outrageous, especially relative to its competitors, so that’s not a reason to short it.
Consequently, owning the shares here makes sense for investors who believe they will eventually get it done. This makes the investment decision really easy, just plug your nose and own it for the long term. I consider this a speculative trade that can exist in a well-balanced portfolio. Because the conviction level is moderate, sizing of the trade needs to be smaller than usual. This also leaves room to manage the risk over time.
There are shorter-term levels to know to help guide with entry timing. CGC just reported earnings and investors weren’t that impressed, but they weren’t entirely disappointed, either. The stock spiked on the headline and then almost immediately gave it back up.
The important bit is that the bulls continue to maintain a baseline from which they continually buy the dips. As long as the CGC stock price stays above $15 per share, then eventually the upside scenario will unfold.
There are lines of resistance along the way and the biggest battles will be near $22, $26, and $30 per share. Those were major fail points in recent history so there’s little chance that the bulls can slice through them without struggle.
The Easier Way to Trade CGC Stock
The options market offers an alternative way of profiting from these intrepid companies. Instead of buying shares of Canopy Growth, investors can sell the $12.50 January put and collect $1.50 per contract. This is a bullish directional position that profits without needing a rally.
In fact, the stock can fall 35% from current levels before suffering any losses. The worst case scenario of this trade is that the investor would then own share $4.50 cheaper than today’s price. Most investors are scared of options, but in reality they offer great alternatives, so it’s worth learning the basics.
There’s also extrinsic risk from the stock market in general. The indices are setting records during the worst economic conditions ever. This just isn’t logical so they are vulnerable to sharp corrections and without warning. If that happens, then this would place selling pressure on CGC stock as well and to no fault of its own.