After looking like they were set to break down, shares of Canopy Growth (NYSE: CGC ) have been surging over the past few trading sessions. As such, CGC stock is up almost 20% over the past five days and on the cusp of breakout territory, with higher prices on many bulls' radar.Source: Shutterstock
What so suddenly has CGC stock back in investors' good graces? To be fair, the company didn't really do anything to fall out of their good graces. Rather, it was simply the fading momentum of marijuana stocks at the time.
However, momentum was restored in Canopy Growth stock once reports began circulating about its intention to purchase Acreage Holdings (OTCMKTS: ACRGF ). The deal is for $300 million in cash and swelled to $3.4 billion once Canopy included 0.58 shares for each subordinate voting share of ACRGF.
Investors are viewing the deal favorably as Acreage Holdings has exposure in 20 different U.S. states. In other words, it's Canopy's way of pushing into the U.S. This comes as it focuses on its future and growing its market share. At the end of the day, market share is a very important component to the cannabis industry. That's one reason why Canopy is considered the leader of this group.
Trading CGC Stock
The charts for CGC stock look a little busy here, but each level is relevant. The recent action has shown a return of momentum to Canopy Growth stock, but also names like Aurora Cannabis (NYSE: ACB ) and Cronos Group (NASDAQ: CRON ), among others. It's even given a boost to names like Constellation Brands (NYSE: STZ ), which has a near-40% stakes in CGC.
That momentum has carried CGC stock into a potentially large breakout area over $48 . Where can it go? One analyst says Canopy could run to $72, implying about 90% upside from current levels. Can it actually get there?
$48 is the first key test. In the last three trading sessions, CGC stock reclaimed its 20-day and 50-day moving averages as well as prior uptrend support (blue line No. 1). It also cleared prior downtrend resistance (blue line No. 2) and key resistance at $48. Now hovering near $48.25, it's important that CGC stock doesn't give up these recent gains.
Whether it can burst through its prior highs near $59 and run to $72 is currently unknown. But if it wants any shot at doing even that, it needs to hold over some of these key levels that it just cleared.
Here's what to watch: $48 and prior downtrend resistance (blue line No. 2). According to the RSI, CGC stock is not overbought even after its strong rally over the past few days. According to its MACD reading, momentum is returning to the bulls' favor and could have a lot of upside going forward. Ideally we would see a continuation higher or consolidation near current levels, before a pullback to $48 that holds as support.
If $48 soon acts as resistance, bulls need to see the backside of prior downtrend resistance act as support.
Bottom Line on Canopy Growth Stock
If investors feel that there is momentum in cannabis stocks, then CGC stock is certainly one of the top considerations to ride that wave . In the end though, this is a speculative group and investors have to remember that going forward. This isn't some blue chip stock with a reasonable valuation and strong cash flows.
Last quarter (Q3, fiscal 2019), the company had $60.8 million in revenue. That's roughly the same total as it did for all of fiscal 2018. Clearly the growth is very impressive, but we're talking about a company that has consensus expectations for $176 million in sales this year vs. a market cap of more than $16 billion .
Granted, estimates call for more than $600 million in sales in fiscal 2020 (which starts in one quarter), but this is still a lofty valuation. That's why M&A deals (such as with Constellation) are so important. It puts billions of dollars into Canopy's coffers, allowing it run its operations and make deals like it did for ARCGF.
It's a speculative group, but Canopy is among the best in the business.
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