Cannabis stocks rallied fiercely in 2018 when they were all the rage. The imagination of the applications they had took investors in all different directions. Stocks like Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY) and Aurora Cannabis (NYSE:ACB) were superstars back then. Unfortunately they all fell off a cliff and out of the media limelight. Recently, however, they’ve made a comeback thanks to the apparent Joe Biden win in the U.S. elections. In case you forgot how volatile traders are with pot stocks, consider this. ACB fell 26% on Tuesday and another 16% after hours. Meanwhile, CGC stock only fell 3.5%, so among mad tickers it’s the sane one.
Canopy Growth is still the best of the bunch and deserves our attention today.
Investors who want to invest in pot stocks must consider this one among all others. Wall Street blessed it as the one with the most potential and the least risk. Management has billions it got from Constellation Brands (NASDAQ:STZ) to help it execute on plans. Recently they all rallied incredibly fast on the prospects of a favorable political setting.
The Fundamentals Are not a Problem for Canopy Growth
While the fundamentals are good, investors often get timing in CGC stock trades wrong. These are momentum stocks so they are tricky to trade. If you believe in it for the long haul then own it through thick and thin. Else, trade around the edges.
Today’s note is bearish but only as a cautionary tale. My opinion is not against the company fundamentals but rather the trade timing. I believe in the viability of cannabis as an investment thesis. In fact my last write-up about CGC stock in August was bullish. Back then I thought that it had upside potential, but I expected a small dip, and that’s exactly what happened.
I am not one to chase runaway rallies, and the cannabis stocks just finished a ridiculous one. They need to consolidate a bit.
Technically CGC stock ran into levels that were accident scenes more than a year old. More often than not, sellers show up in force there — at least at the first go around. It is best to fade and let them retest for better footing. Then the bulls can gather enough momentum to take the resistance out.
I don’t condone shorting the stock, I merely want to temper the enthusiasm after a long run.
CGC Stock Bulls Are Making Great Progress
I recognize that momentum trading is a viable strategy, but not if investors come into it too late. CGC stock rallied almost 100% off of the October low, and this would rarely make for a good starting point. Fast profits make for weak hands, and it’s best to shake a few of them out to resume higher. This was my opinion last Friday, and after the Monday market-wide drunken rally, I was convinced of it.
Canopy Growth stock almost hit $27 per share, which is higher than I expected. I thought that the January high would hold for a bit longer. Consequently I wrote a short gallery about fading the cannabis rally. It is never my intention to wish losses on stock fans, but the article was prophetic.
Nevertheless this marks big progress for CGC stock bulls. Poking prior resistance and fading from it is constructive price action. Now they can find footing to reestablish the base below so they can head back higher. The goal is to set higher-low trends to recover old glory.
Cannabis stocks now have much better fundamentals than they had the first time they were popular. However it is important to recognize that they are still bound by federal laws. Their business is still technically illegal in the United States, but therein lies the opportunity. If indeed a Democratic presidency is going to be more favorable to them, that deregulation headline would be huge. Therefore under the threat of such news it would be a bad idea to short these stocks with conviction. They’ve done so well against so many headwinds. I salute these intrepid companies that continue to surprise us.
Stick With the Best
There are more exciting names to trade than Canopy, but CGC stock would be my pick. Throwing a blanket on the whole sector by using ETFMG Alternative Harvest ETF (NYSEARCA:MJ) is also viable, but I would rather avoid unknowns from other companies. The whole sector is still speculative, so size matters, Taking large positions leaves investors open to a lot of uncertainty.
Don’t forget that two days ago, markets made new all-time highs. That alone leaves room for downside pressure from general corrections.
We are resetting another round of earnings in cannabis stocks, so there should be lull. It will be long before the benefit of a new president impacts the bottom line. But Wall Street loves to price the potential immediately. Hopefully it won’t be a sell-the-news event going into 2021. In short, I would rather wait for a correction before buying CGC stock.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.