Marijuana Stock Pick: Canopy Growth Corporation (CGC)

Marijuana image

Canopy Growth Corporation (CGC) engages in the production and sale of marijuana for both medical and recreational purposes in Canada. The company holds multiple brands to appeal to various types of customers including doctors, recreational users, and strategic affiliates. Some of its well-known brands include Tweed Inc., Bedrocan Canada Inc., and Mettrum Health Corporation. For fiscal 2019, the company generated a top line of CA$226.3 million while employing 4,000 people.

Technical Analysis of Canopy Growth Corporation (CGC)

A quick look at the weekly chart shows that CGC is consolidating while in a strong uptrend.

In October 2018, the stock posted an all-time high of $59.25. At that point, the stock was showing signs of bullish exhaustion. First, CGC respected resistance of $50 as it closed the month at $36.89. In addition, there was a large bearish divergence on the weekly RSI. These signs pointed to a significant correction.

CGC did correct as it plunged to as low as $25.26 in December 2018. Fortunately for the bulls, the bleeding stopped there. The stock generated a higher low setup and since then, it has been flashing bullish signals.

Technical analysis reveals that the stock is positioning to finally take out resistance of $50. A move above this price level will trigger the breakout from an ascending triangle pattern that is visible in both the weekly and monthly timeframes.

Recent price action supports our bias. The equity appears to have printed another bullish higher low of $38.08 on July 3, 2019. The wick below this week’s candle is a sign that the stock is rejecting lower prices. If our read is correct, then bulls should be able to breach resistance of $50 in the next rally.

Fundamental Analysis of Canopy Growth Corporation (CGC)

In addition to our technical analysis, the fundamental analysis also supports our bullish view.

While Canopy’s adjusted loss per share was over 206% higher than the estimated CA$0.32, the company’s sales growth has been nothing but stellar. For the fourth quarter of 2019, Canopy posted revenues of CA$94.1 million versus the consensus estimate of CA$92.2 million. Year-over-year, its sales of CA$94.1 million for Q4 of 2019 is a surge of 313%.

In addition to that, revenue jumped from CA$77.948 million in 2018 to CA$226.41 million in 2019. That’s an astonishing growth of over 190% in one year.

These figures tell us that there’s demand for Canopy’s products. However, the company is yet to book strong profits due to the increase in spending on research and development. It is also expanding beyond the borders of Canada into the US to penetrate the country’s CBD market. As long as sales remain strong, we can count on these expansion projects to pay off in the future.

The strategy is to buy on the breakout and retest of $50 as support. If bulls can convert $50 resistance into support, CGC will likely take out the all-time high and target $75.

The timeline for the target is less than a year.

Weekly CGC Chart

Canopy Growth Weekly chart
Canopy Growth Weekly chart

Monthly CGC Chart

Canopy Growth monthly chart
As of this writing, the Canopy Growth Corporation (CGC) is trading at $41.06.

Summary of Strategy

Buy: On the breakout and retest of $50 as support.
Target: $75
Stop: $47.50 after the breakout

 

Disclaimer: The writer does not own shares of Canopy Growth Corporation (CGC).
Featured image courtesy of Shutterstock.

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.