U.S. Markets closed

Canopy Growth Stock Has Gone Up in Smoke

Nicolas Chahine

Last year, Wall Street investors could not get enough of cannabis stocks and Canopy Growth (NYSE:CGC) was the cream of the crop. This is because it received a large $4.5 billion investment from Constellation Brands (NYSE:STZ). But we have since seen since other mistakes in valuations like the one in WeWork that cast doubt over business acumen.

MJ Etf

Source: Shutterstock

At this moment, CGC is also looking like it won’t pan out as planned for STZ. CGC stock has fallen over 60% from its October 2018 highs. So the question now is it a broken company or merely a broken stock that has lost its momentum?

This is a complicated answer because no one really knows the future of the cannabis industry. So CGC is not alone — all of its peers are also in free fall. Tilray (NASDQ:TLRY) an Cronos (NASDAQ:CRON) are down 70% and 30% year-to-date. After all, cannabis is still illegal in the United States at the federal level. This means that these companies are at a disadvantage on Wall Street. Something will need to change so that the market unshackles these stocks. It will take a miracle for CGC stock to live up to expectations.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

The bullish story burst onto the scene with great excitement. The applications for cannabis into the mainstream were endless. Now that the frenzy has ended, realism set in. The pudding has to hit the plate in a manner of speaking.

CGC Stock Is Broken

Technically, CGC stock is in free fall with a potential target of $16.50 per share. This is a zone more so than a hard line in the sand. Nevertheless this is a far cry from its high of almost $60 a share. So this is a wake-up call for Constellation Brands’ assessment of its original Canopy Growth valuation. The bulls most recently presented their best effort at $19.78. That’s the line to beat for now. Ledges like this become heavy resistance until the bulls recover them.

Fundamentally the drop in CGC and its competitors makes their valuations now slightly less insane. This is not to say that cannabis stocks are cheap by any means. But now they have shed a lot of their froth. But in reality, no one really can assess how cheap they are because they are trying to establish something that has not yet existed in the legal Wall Street realm. This is a bet that I personally am not willing to take. But some investors, who are more familiar with the ins and outs of the industry, can make more educated guesses on the likelihood of a CGC recovery.

The Bottom Line on Canopy Growth

Some of the stock drop is self-inflicted from management headlines. So if the company can get its act together, perhaps it can again retrace its steps in the stock market. Short term, there is significant resistance for CGC at $23 per share. The onus is on the bulls to recover that level so they can start building positive momentum over time once again.

The alternative would be for the bulls of CGC stock to get a miracle headline that would bring them back to levels from say six months ago. This is truly a hopium trade where if I buy the stock today I am hoping that things will work out for this struggling industry. Nothing currently in the charts or in the headlines is looking promising. So whatever drives CGC stock higher will have to come from somewhere else.

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.

More From InvestorPlace

The post Canopy Growth Stock Has Gone Up in Smoke appeared first on InvestorPlace.