In 2017 we had the Bitcoin craze and last year Wall Street was high on the cannabis trade. Canopy Growth (NYSE:CGC), which is the largest Canadian company of its kind, took center stage when Constellation Brands (NYSE:STZ) invested $4 billion in it. This further legitimized the pot potential after an increase in the legalization trend. Since then, companies like Coke (NYSE:KO) have also been in pursuit of the pot of gold — pun intended.
The bullish thesis on cannabis is very broad. This makes it easy to accept and difficult to short. This also makes for some lofty expectations. Companies like Tilray (NASDAQ:TLRY) and Cronos (NASDAQ:CRON) are perhaps two of the most expensive valuations I’ve seen. TLRY has a market caps of $7 billion on only $20 million of revenues, and CRON’s is $3.9 billion on only revenues of $3 million.
From that perspective, CGC stock is not that much cheaper — except this one has a fortress balance sheet thanks to the STZ investment. What ever the potential opportunities they may see, they have the money to pursue them the proper way. Growth becomes attainable, and that is good reason to pay up for the stock now.
Wall Street is doing just that this morning, as the stock is moving 5% on the heels of the conference calls. Management reported earnings last night, and so far the reaction then was muted even though the report was solid. I caution that the stock move so far is still well below what was expected so investors could still change their mind today. But even then, this is the short term and the thesis for CGC stock is for the long term.
CGC Stock Earnings
The report was strong on most metrics. They delivered triple-digit growth on sales and deliverable. They sold 10,100 Kg in the third quarter and that is a whopping 360% increase from the prior quarter. This is a steep ramp, and most of it was for recreational use. So the legalization trend has a significant impact on how much product CGC stocks can deliver.
Therein lies the cannabis mania. More headlines on those fronts will surely drive the demand and stock price up.
The sky’s the limit since it’s new territory. This potential has attracted mainstream large-cap companies like STZ, but others like KO have been looking as well, so they have yet to scratch the surface. Doubters of the sector should be careful here. Shorting a broad bullish thesis could bring financial ruin to staunch bears.
Since there are so many opinion of future income streams for cannabis companies like CGC, it’s hard to shoot them all down down. It would be like fighting a multi-headed snake. When you think you beat one argument, the stocks rally on another angle or point of view.
So where is the growth going to come from next? With the legalization trend being so young, there will be exponential growth, from the direct-to-consumer sales through retail and online. And as more regions amend their laws to accept it, cannabis will expand its current product lines but also add more of the same.
Currently the edibles, drinkables and medicinal are three of the most popular topics of discussion, I bet there will be dozens more soon to add to the list. This will broaden the scope of potential corporate acquirers like STZ did.
The bottom line is that Canopy Growth stock should have no limit for as long as the stock market is rising. The quest for new uses of cannabis and the efforts to expand what’s already on hand is too strong to stifle in the short term. That is why the stock moves so violently on a daily basis. The fear of missing out is too great. So those who missed the run the first few times can jump into the stock on dips.
Technically, CGC stock behaves well, filling the chart patterns. As active a chart as it has, the breakdown and breakout levels have so far been predictable. It is now 85% higher than it was on Christmas and it is trading inside a tight range. This builds up pent-up energy that will need to resolve itself. This usually happens in a breakout or breakdown from significant levels.
In this case, If Canopy stock loses $41.60, it could retest the $35 zone. Conversely and if the bulls can break through $48 then $52, they can invite enough momentum buyers to mount a $12 rally from there. In fact, CGC may already be in a breakout pattern with a measured move to $60 per share.
Normally I want to wait for the breakout line to happen before I chase stocks. In this case, I would make an exception and buy get long CGC early because it is a fast mover. But I would put a tight stop below $41.60. I could do this using options, but even if I buy the stock outright, I would consider selling covered calls to mitigate my risk. Long term, this stock could be a massive home run, we just cannot quantify it yet and that is exciting and totally worth the risk.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
