- Canopy Growth (CGC) stock is out of favor on Wall Street
- CGC stock valuation now is a favorable argument
- Short trade opportunities for long term investments
The bad news for Canopy Growth (NASDAQ:CGC) stock is that it has been falling non-stop for a year. The even worse news is that it did that even when the stock markets were making new highs. Needless to say that CGC stock has been on the defensive end of the investment spectrum. This is becoming a habit because a similar thing happened between 2019 and 2020. Even though they’ve had excellent fits of strength, pot stocks crash hard.
To be fair, the whole sector has had an unfair disadvantage. So far the U.S. regulators have not yet unshackled the cannabis business. It is still illegal on the federal level to handle cannabis. Therefore there are inherent hurdles for Canopy and its competitors. I appreciate what they’ve accomplished in spite of the risks.
Cannabis Has Legitimate Opportunities
The negative stock price action doesn’t change the potential opportunity in the business. The uses of cannabis in mainstream America will have a bright future. I don’t mean from the recreational perspective, because that does not need my endorsement. Current users are strong enough sales reps for that thesis.
My arguments are the applications of it in other mainstream sectors. For example, the medicinal purposes are already a thing, so they could widen in scope. What’s new could be from the popularizing of the edibles, drinkables and the topical spreads. There must be dozens of new verticals where cannabis companies can build new income streams.
Meanwhile CGC stock is falling out of control until they fall back in favor on Wall Street. In 2018 they couldn’t have enough of them, and now they are toxic. This is not to say that pot stocks don’t spike because they do.
In fact Tilray (NASDAQ:TLRY) is the poster child for monstrous surprise rallies. It went to $300 per share in two month after its initial public offering (IPO). Back then CGC made headlines when it attracted $4.5 billion investment from Constellation Brands (NYSE:STZ). So that gave it instant notoriety as the leader of the pack and the one to own. I don’t disagree with that much, although I favor TLRY a bit now.
Regardless of my personal bias, there is enough business for both of them to succeed. Therefore what goes for one goes for the other. Short term, it’s more about their stock charts than they’re fundamentals. Nothing is moving along those fronts, except for the recent reminder that the White House is still considering legalizing it. It looks promising since it’s moving forward in spite of President Joe Biden’s opposition. Otherwise CGC stock has clues to help guide investors for the next few months.
CGC Stock Path to Recovery
The fundamental arguments for the valuation have improved tremendously. This is mostly because of the stock price drop thereby normalizing the metrics. For example and at their height, CGC’s price-to-sales (P/S) ratio was insanely high. Currently CGC stock carries a very reasonable P/S, which means that holder are more realistic. Their expectations going forward are not out of touch with reality. Therefore, it will be harder to disappoint them so the recent lows should hold.
CGC is at levels that served as a base in 2017, so there should be willing buyers here. Those who missed for the first two massive rallies may want to partake in the next. I do have some concerns over the spending as currently investors hate its excesses. For CGC to attract buyers, management needs to relay a message of fiscal responsibility. There is also the potential of a market-wide correction, which could add to the drag.
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.