Canopy Growth (NYSE:CGC) stock carried great momentum from last year. It started 2021 with a bang but then it crashed. CGC stock now is almost 70% below the February high watermark.
After the exuberance of the new U.S. regime wore off, sellers stepped in with force. Investors last year priced in Democrats’ victory too quickly. The assumption was that Democrats would be more conducive to legalizing cannabis on a federal level than a Republican-led regime.
Extreme moves are always wrong and they bring about opportunity for failure. Somewhere in the middle lies the truth and that is the thesis today.
The pot industry has done really well considering that it is still an illegal substance. Some states have blazed the trails – pun intended – but the White House is still dragging its feet.
That headline will become a catalyst eventually, even though the idea has been around for a while.
Meanwhile, Canopy Growth stock can meander higher as its conditions improve.
CGC Stock Has Competition for Supremacy
Fundamentally, I am losing confidence in the CGC advantage. I initially gave it higher marks than its competitors because of its cash position. However, the balance sheet is no longer as bulletproof as before.
In 2017, Canopy Growth received $4.5 billion in cash from Constellation Brands (NYSE:STZ). These days, I favor Tilray (NASDAQ:TLRY) after the merger with Aphria. However, they are both interesting at these levels.
Anyone who had wished they owned CGC stock in February logically should consider it down here. FOMO is a powerful motivator to chase at the wrong time. Investors need to overcome the opposite of FOMO and buy it under duress. That’s more often than not a righter time than in FOMO mode.
Although they don’t ring bells for a perfect entry point, CGC below $19 per share is a relative bargain. This is where investor time frame comes into play in determining strategy.
I’ve been consistent with my opinions on upside and downside opportunities so far. I am always cautious about not blindly chasing the herd. Also, since the indices are at record levels, there are higher odds of corrections. Therefore, I favor using options to build a moat around my risk.
Instead of spending $19 per share to buy CGC stock outright, I prefer selling puts. This would allow me the opportunity to own shares much slower and collect a premium for it.
The worst-case scenario for me would still be much better than someone who bought shares instead. By the time they are down 25%, I would have the opportunity to still break even. Selling puts also means that there is no out-of-pocket expense to deploy the trade. Moreover, I would not need a rally to win. The only scenario that would bring me losses is a complete debacle in the stock market.
TINA is Alive and Well
Investors are on edge even though the CBOE volatility index (VIX) is at its five-week low. I contend that it is not measuring the correct level of fear. Because of the acronym TINA (there is no alternative), investors are piling into equities by default.
The current extremely loose monetary conditions forced all investors higher on the risk echelon. The U.S. central bank’s dovish stance has eliminated fixed-income sources. Buying stocks is paying really well. The Fed’s safety net gives investors the perception that stocks can only go up. The Reddit Apes are not completely wrong on this.
I say this with a chuckle because if there wasn’t risk, there wouldn’t be rewards. The markets have never been higher, but neither have the stakes. We are going into a big unknown soon. The Fed has guaranteed us that its next move will be bearish. The equity buyers are unrelenting regardless.
My worry is that not enough experts are watching the wheel and we are going 100 mph.
Regardless of how good this CGC stock opportunity seems, I downgrade it a bit because of the overall concerns. Going all in just because I think highly of a company is a mistake at this point. Using moderation has never been more appropriate than now.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
