Wait For Canopy Growth Stock to Fall to $40 Before Longer-Term Uptrend
Shares of leading Canadian cannabis producer Canopy Growth (NYSE:CGC) have been red hot so far in 2019. Year-to-date, CGC stock is up more than 65%, amid a flurry of positive catalysts including U.S. operational expansion, strong ramp in the Canadian business, and multiple analyst upgrades.
Source: Shutterstock
But, it’s important to note that the entire 2019 rally in CGC stock happened in January. During the first month of the year, CGC stock rose over 80%.
ETFMG Alternative Harvest ETF (NYSEArca:MJ), with CGC stock as its fourth-biggest holding, has gained about 49% this year.
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Some investors are concerned that recent weakness is a sign that the stock could be due for a repeat of late 2018. CGC stock staged a similar huge one-month rally in August 2018, before trading largely sideways in September and October, and then collapsing in just in time for Halloween.
On the surface, the comp holds water. Canopy Growth stock staged a big rally in January 2019. It has traded largely sideways for the better part of February and March. Now, in late March, CGC stock is dropping, and recently broke below its 50-day moving average.
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But, the surface is where this comp ends. Many things have changed since late 2018 which should keep shares from falling off a cliff here. Instead, it looks like CGC stock will drop back toward $40, where it will find key technical support, and then reverse course and continue on a longer-term uptrend.
This Isn’t a Repeat of Last Year
To be clear, many things have changed about the Canopy Growth narrative since late 2018. Those changes both warrant the big early 2019 rally, and will keep shares from falling off a cliff anytime soon.
Six months ago, Canopy Growth was a leader in what was a very nascent and largely unproven Canadian cannabis market that was still struggling to find its footing post-CBD legalization. Quarterly revenue was a hair above $17 million, or $68 million annualized, implying a ~175 most-recent-quarter (MRQ) annualized sales multiple. Revenue growth was just 33% in the second quarter when the company sold just over 2,000 kilograms of cannabis. That was up just 9% year-over-year. Plus, Canopy had essentially zero presence in the potentially huge U.S. market.
Today, Canopy Growth is a leader in what has become a healthy and largely proven Canadian cannabis market that is finally starting to surge post-legalization. Quarterly revenue in the third quarter was more than $60 million, or $240 million annualized, implying a ~60 MRQ annualized sales multiple. Sales rose nearly 300% year-over-year in Q3, and over 250% sequentially. The company sold 10,000 kilograms of cannabis last quarter, up more than 300% year-over-year. Importantly, Canopy has entered the U.S. market by earning a state license to process and produce hemp in New York and buying U.S. hemp outfit AgriNextUSA.
Source: New Frontier Data
Just yesterday, Canopy announced it received a cultivation licence for its facility in Fredericton, New Brunswick, which should help supply the Atlantic Canada market with legal recreational cannabis.
In other words, everything has changed over the past several months. Canopy has gone from highly speculative cannabis investment lacking in fundamentals and long-term growth clarity, to a much-less speculative cannabis investment with strong fundamentals and healthy long-term growth visibility.
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That’s why CGC stock is unlikely to repeat its late 2018 trading action. Recent weakness in the stock won’t turn into a huge 50% sell-off. The fundamentals and long-term growth narrative today are simply too good to allow that happen.
Pay Attention To $40
On the technical front, the level to watch in CGC stock is $40. This is roughly where Canopy Growth’s 100- and 200-day moving averages both sit, and it’s where the stock should find some support amid recent weakness.
During the late 2018 sell-off, CGC stock rapidly broke through its 50- and 100-day moving averages. Importantly, though, it found support at the 200-day moving average. The 200-day support level finally broke in December 2018, amid a broad market wipe-out. But, the stock has since retaken and held its 200-day moving average.
In other words, ex macro-economic headwinds, the level in CGC stock that has largely held amid huge moves over the past several months has been the 200-day moving average. Right now, that moving average is closing in on $40.
I fully expect broader market weakness (thanks, inverted yield curve) to continue to drag the stock close to $40. But, once CGC stock nears that level, history says that the shares should reverse course. The fundamentals imply this, too, as Canopy Growth remains on track to be a $100 billion-plus company one day.
Bottom Line on CGC Stock
CGC stock is a potential multi-bagger in the making. As such, recent weakness is largely just noise in the big picture, which shows Canopy Growth potentially turning into a $100 billion-plus company at the head of a trillion-dollar global CBD industry. That doesn’t mean recent weakness won’t persist. It will. But, the stock should find some support at $40. That’s where I plan on adding exposure.
As of this writing, Luke Lango was long CGC.
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