Marijuana stocks have been hit hard over the past few months, as investors have apparently lost confidence in the sector amid disappointing sales trends in Canada, a lack of legislative progress in the U.S., and huge competitive pressures which have eroded margins and made sustainable profitability seem like a long shot.
Over the past six months, all major marijuana stocks are down sharply, including the king of the industry, Canopy (NYSE:CGC). During that stretch, CGC stock has shed more than 40%.
But now is the time to buy the dip of CGC stock because all is not lost In the big picture, CGC stock – along with all other marijuana stocks – will be very volatile for a long time. That comes with the territory of being an early leader in a nascent growth market with tons of long- term growth potential.
But in the long run, the huge rallies of the marijuana stocks will materially outweigh their gigantic drops, and Canopy Growth stock price will jump meaningfully in the next five to ten years.
Right now, it looks like CGC stock is positioned to go from “huge drop mode” to “tremendous rally mode.” The fundamentals of Canopy Growth stock are improving, the shares have reached a technical support level, and CGC has meaningful catalysts on the horizon.
As a result, now is the time to double down on CGC stock for the long-term. In the near-term, Canopy Growth stock price is ready to bounce. Over the long-term, it is still on track to rise by a few hundred percent.
CGC’s Fundamentals Are Improving
The core fundamentals underlying Canopy Growth stock hit a road bump in early 2019. Now the company is moving past that road bump, and most signs suggest that its fundamentals have dramatically improved in recent months.
Canopy’s numbers for its fiscal fourth quarter which ended in March weren’t very good. In Q4, its growth was relatively sluggish, Its revenues rose just 13% versus Q3, and its margins came under pressure, as its gross margins dropped quarter-over-quarter.
This sluggish growth and margin pressure were the norm for cannabis companies in early 2019. These struggles line up with the macro data, which shows that the legal Canadian cannabis market actually declined in January and February.
That same macro data shows that the Canadian cannabis market has since come roaring back. Specifically, the market’s sales rose month-over-month in March,April,and May. The implication is that things are getting better for cannabis companies and marijuana stocks.
Indeed, they are. Aphria (NYSE:APHA) just reported Q4 numbers for the three months ending in May. The company’s numbers were really good. Its cannabis revenue rose nearly 160% versus Q3, while its net revenue jumped 75% compared with Q3. Its gross margins increased quarter-over-quarter, and it reported positive EBITDA for Q4. In fiscal 2020, Aphria expects nearly 200% revenue growth with positive EBITDA.
Even more recently, Aurora (NYSE:ACB) reported preliminary Q4 numbers for the three months ending in June. Those numbers, too, were really good. The company’s net revenues rose almost 60% versus Q3, up from 20% sequential growth in the previous quarter.. Aphria’s gross margins improved quarter-over-quarter, too.
Overall, then, it appears the fundamentals underlying the Canadian cannabis market are rapidly improving, with sales growth re-accelerating and margin pressures easing. That’s great news for Canopy Growth stock.
Technical Support Has Arrived
This great news is arriving for CGC at the same time that Canopy Growth stock has reached a critical technical support level.
As I noted earlier, large drops are nothing new for Canopy Growth stock. Indeed, back in late 2018, Canopy Growth stock price hit $50 and then fell off a cliff. CGC stopped tumbling around $30.
Again in 2019, CGC stock has fallen off a cliff after reachng $50. Again, Canopy Growth stock has found support around $30.
This support should hold, given the company’s fundamental improvements. Additionally, for the foreseeable future, investors’ sentiment towards marijuana stocks should improve. This improving sentiment will remove the selling pressure which has dragged Canopy Growth stock price lower and replace it with buying pressure, meaning that CGC may not drop below $30 for the foreseeable future.
Significant Catalysts on the Horizon
Canopy Growth stock is positioned for a gigantic pop in the second half of 2019 due to two major catalysts.
First, Canopy’s next earnings report will be really good. Early 2019 numbers from Aphria and Aurora were both bad. But their mid-2019 numbers have been good, characterized by accelerating revenue growth and margin expansion. Canopy’s mid-2019 numbers will also likely feature revenue growth acceleration and margin expansion. If so, the company’s next earnings report could be a huge positive catalyst for CGC stock.
Secondly, cannabis 2.0 products are set to launch in Canada in late 2019. These products include vapes and edibles, and should do two things for the country’s cannabis market.
One, they will meaningfully boost demand for cannabis, since vapes and edibles are two very popular methods to consume cannabis. Two, they will provide a material margin boost, since these cannabis 2.0 products carry higher margins than dried flower. As a result, not only will Canopy’s next earnings report be very good, but its next few earnings reports should be pretty good, too.
Overall, CGC stock will roar higher in the back half of 2019 because the company is poised to report a string of very strong results which will inspire long-term confidence in Canopy Growth stock.
The Bottom Line on CGC Stock
It’s been a rough few months for Canopy Growth stock. But it increasingly appears that the worst is over for CGC, and that a huge turnaround is on the horizon for the shares. As a result, now is the time to double down on Canopy Growth stock, before the recent selloff turns into tomorrow’s huge rally.
As of this writing, Luke Lango was long CGC and ACB.
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