2018 was a wild year for stocks. It was a time where headlines ruled the price action, not fundamentals or homework. They were secondary to White House tweets and press releases from China and Europe. Trading last year’s conditions was hazardous if not for having great timing and luck. Results were often headline-dependent binary outcomes. As a result, the S&P 500 turned in a red year for the first time since the recovery from the 08 financial disaster.
No area of the market was wilder than the cannabis space. Canopy Growth (NYSE:CGC) still managed to end the year up 8%. The company made headlines last year by drawing major money interest. Constellation Brands (NYSE:STZ) invested $4 billion for a 37% stake in the company.
This immediately propelled CGC as the legitimate contender in the field. There were wilder trades in the space, for example, Tilray (NASDAQ:TLRY) delivered 200% year-to-date, but that one is too wild for me. TLRY has a massive $6.5 billion market capitalization when its total sales are a mere $20 million.
Canopy Growth stock still outperformed the sector’s exchange-traded fund, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), which fell 20% last year. Now the group needs the general market’s help. If it can find footing in the first quarter, then cannabis will come back en vogue.
Of the whole bunch, I prefer CGC stock as a sector investment. I want to leverage the homework that Constellation did and bet on the same company they did. It is reassuring to know that STZ found CGC to be worthy of a $4 billion dollar bet.
Fundamentally, the whole sector is bloated. The industry in its legitimate format is still developing so the price is pure speculation on the future. The Advent of the legalization of marijuana, especially in Canada, got Wall Street high on the stocks. But it is still in its infancy stage.
The interest is not so much in the sale of the substance, but rather its potential uses in mainstream consumption products, especially beverages and medical fields. The thesis at this point is vague, so the sky’s the limit and normal logic does not apply. But to that end, CGC has a nice pile of cash with which it can deliver on the potential upside wherever it may be.
What to Expect From CGC Stock
Technically, there are clues. Wall Street had been high on CGC stock, but recently fallen out of favor. The correction finally brought it into potential support; $24 per share has served as prior bounce levels, and until broken, I assume it will again. Otherwise, I expect a retest of $20, which also is another potential support level.
The selling is not all due to intrinsic problems. First, we have a crisis of sentiment crippling equity buyers on Wall Street. Second, the raging cannabis rally needs to consolidate before it can resume higher.
Timing is critical, so I have to be cautious entering a risky stock like CGC. To complicate matters, now investors are worried about tariff wars and a runaway Fed who’s about to invert the yield curve and cause a recession. So the overall appetite for frothy stocks is low.
Even the mighty have fallen as we’ve seen Apple (NASDAQ:AAPL) fall 10% yesterday. They warned about deteriorating conditions, especially in China, which further weakens sentiment. AAPL’s problems do not necessarily impact cannabis sales, but money is shy about allocating risk to equities in general.
Nevertheless, the opportunity here is twofold. First this-too-shall-pass, so sentiment will recover. And second, the hangover that is holding CGC stock down will eventually fade. If the cannabis exuberance is real, then it will be at the top of the game.
This is a long-term bet, but I still don’t want to take the whole position all at once. I need to leave room for error. These are treacherous times and caution is more than warranted. The VIX fear index is too high for investors to be lackadaisical about risking too much all at once, especially when we are still this close to the all-time highs.
Click here and enjoy a free video and more of my market thesis and get an ongoing free copy of my weekly newsletters. 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. You can follow him as @racernic on Twitter and Stocktwits.
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