Canopy Growth Corp: Beaten-Down Pot Play Could Reward Contrarian Investors

Why Canopy Growth Stock Can Rise 220%

At the start of the year, we saw some buying return to marijuana stocks, but then the stock market came under pressure, leading to a sell-off of shares of companies in the pot sector. The irony is that pot stocks are priced as if there was more upside potential, but that’s simply wrong.

The industry fundamentals for marijuana stocks have been improving. While we’re still waiting for federal decriminalization of marijuana in the U.S., about 20 states have legalized pot. Recreational cannabis is also legal in Canada, and after a slow start and the COVID-19 pandemic, sales there have begun to pick up there.

The ETFMG Alternative Harvest ETF (NYSEARCA:MJ), a broad holding of U.S. and Canadian marijuana stocks, was trading above $11.00 earlier this year but broke below its March 2020 low to a record low of $6.85 on May 12, 2022.

Chart courtesy of StockCharts.com

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The selling of cannabis stocks has been excessive, but the market is clearly not anxious about adding risk at this time. The situation will improve for marijuana stocks; it’s simply a question of when.

One of my favorite Canadian pot stocks is Canopy Growth Corp (NASDAQ:CGC). CGC stock has taken a significant beating, however. The company’s market cap has plummeted from around $10.0 billion at one point to its current $1.8 billion.

Canopy Growth stock traded at $59.25 in October 2018 after the legalization of recreational pot in Canada. Now trading below $5.00 and down by 45% this year, the selling is overdone.

Chart courtesy of StockCharts.com

Canopy Growth Corp, a vertically integrated grower and seller of cannabis and hemp products in Canada, has an extremely sound balance sheet.

While the Canadian market is its focus at this time, the company operates in 12 countries, including the U.S. If/when the U.S. finally legalizes recreational pot, Canopy Growth Corp will likely ramp up its presence in the country.

Bears Are Negative but Bulls See Opportunity With CGC stock

The technical situation with Canopy Growth Corp is extremely bearish at this time as Canopy Growth stock looks for signs of oversold buying support.

CGC stock is firmly in a downtrend and devoid of any momentum.

Chart courtesy of StockCharts.com

The money flow index (MFI) at the bottom of the below chart shows shares of Canopy Growth Corp currently in a neutral position, despite those shares trading at a low. The MFI combines price and volume and shows the funds flowing in and out of a stock.

I see a potential divergence setting up with the MFI if the indicator continues to rise while the price of Canopy Growth stock declines or is flat. This could foreshadow a rally by CGC stock.

Chart courtesy of StockCharts.com

If Canopy Growth stock is near its bottom and holds, its upside is significant.

Shares of Canopy Growth Corp could initially target their 50-day moving average at $6.31 and then target the next band of congestion with a top above $8.00. That would be a near double. If CGC stock takes this out, the stock could move toward the $12.00 to $16.00 channel of resistance, implying a gain of 220%.

Analyst Take

Canopy Growth Corp will be a major player in the pot stock market once investor sentiment improves. Given Canopy Growth stock’s significant price deterioration, it might be time for investors to slowly add positions.

The company has a solid cash balance that will provide it with financial flexibility over the next few years as the legal marijuana industry grows.

For investors who are looking for a long-term marijuana stock with above-average capital appreciation, CGC stock is a compelling choice.