Posted in Marijuana Investments

Canopy Growth Is Leading Pot Stocks Higher

 Posted by  Posted on November 18, 2020

a banana tree with green leaves: cgc stock © Source: Shutterstock cgc stock

The past six weeks have seen no shortage of big winners. But did you know pot stocks were among the top performers? A perfect storm finally put a bottom in the industry. Shareholders are now riding high on a rising trend. Canopy Growth Corp (NYSE:CGC) has the healthiest chart of the bunch, making it my top pick if you’re looking for a speculative bet. Volatility is nothing new for the Canadian cannabis company, but I’d be lying if I said I wasn’t impressed by CGC stock doubling over the past six weeks.

a bunch of green bananas growing on a tree: cgc stock © Provided by InvestorPlace cgc stock

Optimists will argue it could double again if it musters the strength to return to its 2019 highs. As for me, I’m not a fan of grandiose predictions. All I know is Canopy’s trend is now firmly higher, thus I’m a bull and a buyer. We’ll dig more into the chart to make the technical case in shortly, but first, let’s outline why post stocks are suddenly all the rage.

The Perfect Storm

The trend toward legalizing recreational marijuana use accelerated this month with multiple states voting in favor of weed. Residents in Arizona, Montana, New Jersey, and South Dakota adopted an adult-use cannabis law, expanding the marketplace for the likes of Canopy Growth.

At the same time, Joe Biden’s narrow win of the presidency paves the way for decriminalization.

But it’s not just tailwinds from the election buoying pot stocks, it’s also a pair of rosy earnings reports from Canopy and Aurora Cannabis (NYSE:ACB). Investors cheered both company’s numbers after the pair announced better-than-expected sales forecasts and dwindling losses.

If the positive news and earnings aren’t enough to get you in the buying mood, then the convincing price launch from the lows should. We’ve seen a grand rotation into beaten-down industries from oil and banks to small-caps and value over the past two weeks. The rising tide is lifting lots of boats – cannabis stocks included.

Gallery: 8 Overvalued Stocks to Sell in November (InvestorPlace)

a black computer mouse and keyboard: When investors buy stocks for the long haul, the holding period is ideally forever. But that is not always possible. Valuations may reach unfavorable levels or fundamentals may worsen. When that happens, investors need to re-evaluate the company’s long-term prospects. One of the quickest negative catalysts that will accelerate a blue chip’s safe-haven status is if it gets in the news. That is, news reports that tarnished the company’s branding just might hurt the future returns. Sometimes headlines try to hurt a company’s branding but are really just noise that investors should ignore. Deeper research into the latest headlines concerning the stock is necessary before acting irrationally and selling. But the biggest “tell” that a company is broken enough that it is time to sell is looking at fundamentals. If revenue is slowing and profits are shrinking, an investment portfolio’s performance will suffer. When that happens, it is time for investors to ditch that holding. Macroeconomic risks are higher than ever. Devrim Yaman, a finance professor and associate dean at Western Michigan University's Hawthorn College of Business, said in an email to InvestorPlace that “in 2020, we expect markets to be particularly volatile. This is partly due to the uncertainty surrounding the presidential election in November as well as the primaries before that. The U.S.-China trade war and the economic impact of the coronavirus will likely exacerbate the volatility.” Further, Yaman pointed out the performance disparity between low and high volatility stocks will widen. She said “I expect investors to gravitate towards the high volatility factor in 2020 in order to profit from these fluctuations. This is in contrast to the historical long-term data which shows that overall low volatility stocks earn higher returns than high volatility stocks.” 10 S&P 500 Stocks to Buy Increasing Their Dividends in 2020 The combination of macro risks and tarnished brands suggests that investors might want to drop seven of the following stocks.

CGC Stock Chart

chart, histogram: Canopy Growth Corp (CGC) weekly chart with fresh breakout © Provided by InvestorPlace Canopy Growth Corp (CGC) weekly chart with fresh breakout Source: The thinkorswim® platform from TD Ameritrade

For much of 2020, Canopy shares have been cast adrift in search of a catalyst. The earnings announcements ahead of this month were all duds and lacked the firepower to spark a sustainable trend. The weekly trend was stuck in a range beneath both the 200-week and 50-week moving averages. A higher pivot low formed in October signaling buyers were at least still living, but it’s the mega-breakout and blast through the $20 resistance zone that should really excite spectators.

If you’ve been waiting for the long-term trend to awake, then wait no longer. The bull is awake, hungry, and seeking food at higher prices.

Buyers are currently wrestling with some resistance in the $25 zone. Above that, however, and CGC stock could make a run for $34. No matter how you spin the big picture, it’s now much easier to be a dip buyer now that a bona fide uptrend has taken root.

The sharpness of this month’s ascent is best seen in the daily time frame. Note how the 20-day and 50-day moving average are now both pointing sharply higher. Momentum behind the run has been powerful and makes any continuation pattern that comes down the pike a very tempting buying opportunity. Ever since October, volume patterns have been extremely one-sided. Accumulation days have multiplied to reflect a mass institutional influx.

chart, line chart, histogram: Canopy Growth Corp (CGC) daily chart with momentum surge © Provided by InvestorPlace Canopy Growth Corp (CGC) daily chart with momentum surge Source: The thinkorswim® platform from TD Ameritrade

Chalk that up as yet another reason why the new trend is likely here to stay.

Options premiums are high enough to make short puts attractive. The probability of profit is higher than a long stock position.

The Trade: Sell the Dec $22.50 put for around $1.10.

Consider it a bet that CGC will trade above $22.50 at December expiration. If it does, you’ll pocket $110 per contract.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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Author: CSN