Shares of cannabis company Canopy Growth (NASDAQ:CGC) have certainly come down from the recent highs. CGC stock is now more than 50% below the all-time highs near $60 from last October.
Some of the selling was warranted, given the parabolic rise in the Canopy Growth stock price.
The carnage, however, is getting overdone and it’s time for CGC to begin to “light up” once again.
CGC reported earnings last week and it missed on both the top and bottom line.
The news sent Canopy Growth stock skidding over 10% with shares now trading at the lowest levels of the year near the $27 area.
The technicals point to a potential pop for Canopy Growth stock following that sharp drop.
CGC Stock Chart
CGC stock reached oversold readings on a 9-day RSI basis before turning higher. Bollinger Band Percent B went negative and printed at the lowest levels in over a year before it turned up as well. Canopy Growth stock is also trading at a big discount to the 20-day moving average, which signaled lows in the past. GCG stock finally staunched the bleeding yesterday as shares closed higher on the day. This is even more powerful given that it was right at the long-term support area of $26.50.
As mentioned, the latest earnings report was a clear disappointment with earnings and revenues both missing expectations. Emerging companies like Canopy Growth, though, are more about the future than the present. On the earnings call, current Constellation Brands (NYSE:STZ) CEO Rob Sands hinted at this growth potential. He stated that “over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space.”
Certainly alcohol and beverage giant Constellation Brands believes in the future of the cannabis industry after taking a nearly $4 billion dollar stake in CGC last August. The stake was effectively priced at just over $32, so jumping into CGC stock at current levels would be at a 15% discount to the massive stake taken by Constellation Brands.
Interesting to note that former co-CEO Bruce Linton, who was forced out by Constellation Brands, is adding to his stake in the company. He notes that the company has a decided advantage in intellectual properties versus competitors. Mr. Linton also points to seasonality, with August generally being a weak month (and subsequently a good time to buy) for cannabis stocks historically as trading volumes fall. While corporate insider buying is usually a bullish sign for a stock, insider buying by a former CEO is even a more potent sign.
Long-term believers in the potential of the cannabis industry should consider Canopy Growth near current levels. GCG stock is trading near the cheapest prices over the past few years and held critical support. Price volatility will certainly remain for the foreseeable future, so selling a Jan $35 covered call at $1.50 will help cushion the downside by over 5% while still allowing for 27% upside in the stock.
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Source: Investor Place