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Jul 14, 2021
[4 min Read]
Ok nerds, I'm high right now so be gentle. Also, I'm no expert and this is by no means financial advice, but I want to make a case for CGC as the best cannabis play right now.
Of all the cannabis plays, Canopy appears to be the safest bet. With a strong partner in Constellation Brands (STZ), Canopy is already a leader in the space. If the U.S. gets serious about legalization, the speculators will pile back in and this will take off again. Unlike the last 2 run-ups, it would be in the midst of an improving cost structure, strengthening company fundamentals, new products (THC infused drinks), and even higher global interest in recreational cannabis.
The last quarterly earnings report on 6/1 was a bit of a downer. The past two quarters, in fact, have been downers. There has been a lot of noise though, namely the company was in the process of optimizing operations (closed some facilities, reduced staff) to improve margins and lower costs. They have a strong balance sheet as they hold considerable cash (and equivalents), courtesy of investments from STZ.
The History with Constellation Brands (STZ)
Originally STZ purchased a ~10% stake in 2017. A year later, they tripled down and raised this to 38% with $4 billion (!). In early 2020 they exercised warrants to purchase even more, bringing their total stake to about 38.6%. They are confident in this long term.
Former STZ CFO was made CEO of Canopy in late 2019. The former CEO was fired and I believe this move has been good for the outlook of the company. New CEO David Klein is focused on cost control and taking the company to profitability. Unfortunately, that means the past 2 quarters have seen charges related to this and that produced larger losses than previous quarters and that shook some investors.
But Forget Fundamentals, Lets Look at Magic Candlesticks
As of Friday, the stock has traded down from the YTD daily close high of $52.17 seen on 2/10/2021, all the way to $22.15, a more than 57% decline in just 4 months (oof!). This is way oversold. This chart I drew lines on proves I'm right:
See, the price tanked after what I believe was a bit of an artificial spike in February (this was around the time all shorted, high spec stocks saw panic buying). There wasn't any good news to follow, and as mentioned, the quarterly reports were dog shit so that was fuel for the downtrend since.
But the stock has found support in the low $20's and has been consolidating for six weeks now. The Relative Strength Index (bottom most indicator) came very close to dropping below 30 (technically oversold) but instead hooked up on Friday. The market blip on Thursday shook some people out, but the stock held the support level. We're at the bottom of this consolidation channel, in my opinion. Volume on Friday was lighter than I would have liked to see to confirm this, so we need to see what Monday and Tuesday look like before getting aggressive.
The next earnings report should be in early August, so we're about 3 weeks out. I suspect we'll see a climb back towards $25, at a minimum, prior to that report. Note the volume-by-price bars on the right of the chart. The green line (point of control) marks a potential resistance area. This sits right at ~$25.45 or so.
If this quarter is better than the last 2, we're going over $25. There is reason to believe it will be, given we should be past the bulk of the cost associated with optimization, and the THC infused drinks seem to be popular. They've also done very well with roll-outs of CBD based products, which they can already sell in the U.S. through various partnerships.
And finally, if Congress stops dicking around and starts talking cannabis reform again, we could move back into the $40's by year-end. Breaking that $25.45 level would be key.
Also, seasonality is interesting for Canopy - it has done much better in October->January over the past five years. I'm taking my position now since I don't see this breaking below the current support channel, but a more cautious approach would be to wait until this next quarterly report before taking a position. Like I said, I'm not a financial expert and this isn't investment advice so do your own research and good luck!
Disclosure: I'm holding (and plan to hold >1yr):
Depending on the next earnings report, I may add to these.
TL/DR $CGC 30c 1/21/2022 or shares, because CGC is undervalued and the price seems to have bottomed
Thanks for reading - if this was halfway decent, please let me know - would love to do more, this was fun to write! If it is dog shit, please also let me know so I can try harder next time lol.