Canopy Growth Stock has Upside Potential Emerging From This Covid-19 Hole

Stocks to buy

I decided late last week that I wanted to share this positive upside note on Canopy Growth (NYSE:CGC) stock. But doing it after Monday’s 12% spike — and with little of that lost on Tuesday — makes it difficult because I dislike chasing runaway rallies. Regardless, CGC stock is showing life and remains my pick of the cannabis stocks that are still in the running.

Canopy Growth Stock has Upside Potential Emerging From This Covid-19 Hole

Source: Jarretera / Shutterstock.com

Gone are the wild days of blindly chasing the pot stock tickers. Today’s investors — like today’s pot consumers — are more discerning. Once-hot stock Aurora Cannabis (NYSE:ACB) for example is now under a buck. But the upside of that deflation of exuberance is that now the valuations are saner than ever. CGC for example now sells at only 25 times its sales and I say this with a serious tone. Cronos (NASDAQ:CRON) now has a positive price-to-earnings ratio. During the boom days of 2017 these metrics were out of whack. Furthermore, CGC still arguably has the best balance sheet of the bunch.

Management still needs to earn the respect it wants to command on Wall Street. Investors are willing to give it room but they won’t wait for ever. Gone are the days of having vague path to prosperity. Those died within the last year after Uber (NYSE:UBER) pricked that unicorn bubble. When times are tough, like they are now, investors won’t put up with hot air promises.

CGC Stock: From Single-Digit Hell to December Lows

Cannabis Stock: Canopy Growth Stock Chart
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Source: Charts by TradingView

When the stock market crashed on novel coronavirus fears, Canopy stock fell to $9 per share. This is an important pivot because it was the breakout of 2017 that led to a 580% rally and the highs of October 2018. Since then, CGC stock has been setting lower highs and now is bumping along this level trying to find footing. If the bulls can manage this feat, then they breakout from this hellish descending wedge and target tremendous upside potential, maybe even a $10 rally or more. Arguably, this has already started as on Monday but there is plenty of resistance ahead to go through.

There will be a lot of hard work especially around $19 and $22.50 per share. There will be no free lunches and onus is on management to provide the fuel to pour onto this potential fire. Helping the cause is the fact that CGC stock spent the better part of April consolidating in a tight range. Yesterday’s pop is the first breach of it and should have a little more in it. Then it would be normal for it to fade a little so that they can finish the pattern towards $20.

Once a stock breaks out from a neckline, it’s normal to turn back lower to test it for footing. That’s how bulls build strength on top of prior tough spots. You’ve heard it said as “prior resistance becomes forward support.” This is the case here off Monday’s breakout. In early March I wrote cautioning of potential pitfalls from almost exactly this point. Unfortunately for the fans of CGC, the price action proved me too right. The situation now is the opposite of that scenario.

Fundamentals Still Make Sense

For a long while we’ve been covering the trading opportunities of this stock. But eventually, investors need to set aside the technical aspects and bet on the long-term fundamental thesis for Canopy Growth and it is still needs to be viable. There’s still as vast an array of interests as last few years only with less fanaticism. This is good because this brings better conviction investors to stabilize the stock actions.

Long term, most mainstream companies will eventually have cannabis or its byproducts as part of their line up. This includes edibles, drinkables, topical applications, medicinals and more. There was a deflation in the mania but that doesn’t mean it’s gone. It is impossible to sway those who believe in the stuff, so they will remain committed. And “if you build it” and put it on the grocery shelves, new users will come to check it out … pun intended.

The Covid-19 crisis put a crimp on all stocks and CGC did not escape the carnage. But like most of the markets, it managed to dig itself out of the abyss and onto a platform of sorts. From here the buyers have the chance to build even more upside momentum so it can start recovering some of the lost glory at least of 2019.

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. Join his live chat room for free here.

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