Trying to time entries into stocks is frustrating, especially for the perfectionists. Even if I’m looking to invest long-term in a stock, I can’t help but seek favorable entry points. I am now interested in finding opportunities in Canopy Growth (NYSE:CGC) stock.
Perfect timing shouldn’t be the goal when looking to trade or even invest for the long term. I’m pretty hard on myself, so I usually want to start out my trades on a good note.
Cannabis stocks in general have been very active since the beginning. They burst onto the scene in a massive way and peaked in 2018. Then they went cold while they ameliorated their financials. Now, the companies have much better business outlooks and more reasonable valuations.
However, they have fallen out of favor after the Biden inauguration.
CGC stock has been my choice among all in the sector. I’ve only traded it because of the notoriety it quickly gained from the $4.5 billion investment from Constellation Brands (NYSE:STZ). It was proof enough for me to also believe in them.
Here it is down almost 60% from the February top and it still cannot find footing. What’s more concerning is that it could have just triggered a large bearish pattern once it lost $25 per share. Therefore, it is imperative for the bulls to recover the neckline and quickly. Otherwise the technical downside target is too scary to even discuss.
CGC Stock Fell Into Support
Instead, I will concentrate on the fact that there is a support cluster just below $20 per share. And we can leave it at that. I would risk losing the readers if I noted the actual mathematical value of the downside potential. I’m a strong believer in the statement that somewhere in the middle lies the truth. All extremes are eventually wrong.
The exuberant rally that started last November was too much. Investors went hog wild with the concept that a democratic administration would legalize marijuana on the federal level. This is a headline that needs to happen because it’s a giant hindrance to pot stocks.
The fact that they are doing this well in spite of all the headwinds is incredible. This is testament that management teams have matured quite a bit in the last two years. They have my vote of confidence that they can succeed on Wall Street just as well as any other industry. All they need is a level playing field.
I’ve been very consistent in my writings about the opportunities in CGC stock and others like it. Mid-February it had just corrected 30%, I warned about catching the falling knife too early. A year earlier I shared proper entry points into a selloff, which delivered 280% of upside.
Time to Consider Catching the Falling Knife
I have argued against chasing rallies into prior resistances. Conversely, I called for buying dips to catch the worthy falling knives. I’m almost at that point with Canopy Growth stock again on this dip.
My only reservation is the risk that comes from the overall market. The indices need to correct a little like we are starting to see. I’m not calling for a full-on bearish stint. There is just too much free stimulus money from the government.
Also, this week the two leading indices are taking a breather and that could be a warning sign. So far, we had tag team rotation rallies between the Nasdaq and the small-caps. They’ve lagged since last week and both are under pressure. The Dow and the S&P 500 are picking up the slack, but I am not sure they can do it alone. Energy prices and bank stocks have contributed to those two rallies. I don’t think that can last.
My reservation with catching the CGC stock falling knife has nothing to do with its story. Good stocks can fall to no fault of their own.
At this point, I would only be comfortable using options to get long the stock. My strategy of choice would be to sell October CGC $20 puts, instead of buying the stock outright. This way I don’t need a rally to profit. The worst-case scenario would be for me to maybe own shares after a 20% correction. My break-even point in that scenario would be $18 per share. That is the level from which they broke out last November.
Investors who are not willing to use options should consider only taking partial positions. This way they can leave room to manage the risk by adding at lower prices. Fundamentally, the performance metrics are not alarming. I am a little worried about the spending last year. Maybe it was a non-recurring event so I won’t fret it just yet.
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.