The big talk in the cannabis sector right now is how much cannabis stocks have struggled in 2019.
The cannabis ETF Alternative Harvest (NYSE: MJ) is down 25% in 2019 and 50% from the 52-week high.
Sector leader Canopy Growth Corp (TSE: WEED, NYSE: CGC) led the market lower, down 30% in 2019 and more than 60% from the 52-week high.
Excitement about the booming cannabis industry is at an all-time high. So while this decline has been disappointing for shareholders – it has also created a long-awaited opportunity.
Canopy shares are trading near a 2-year low.
That has Wall Street and millions of individual investors looking to buy Canopy while shares are low – and then look to profit from a big rebound in the next few months.
Canopy has a proven history of steep declines followed by enormous rallies. It happened in 2017 and 2018. In both cases, Canopy rallied between 50% and 100% – huge gains happened in a very short amount of time.
Today, I see evidence that the same cycle is about to repeat itself.
I see four triggers telling me that after the longest bear market in Canopy’s history, shares are ready for a big rebound.
#1 – Canopy Shares Are the Most Oversold They Have Ever Been
Canopy is the most oversold it’s ever been. The relative strength index has hit two all-time lows in the last month. This is a bullish signal that says a big rebound could be coming.
Canopy shares have a proven history of big rallies of 50% to 100% in a few weeks. The last two times Canopy was even close to being this oversold shares delivered big gains.
#2 – Canada 2.0
Canada just legalized cannabis extracts. That move is expected to double the size of the Canadian cannabis market. Canada’s legalization last year is off to a slow start. The industry is struggling with over-regulation and tough competition from the black market that doesn’t pay taxes or follow any laws or regulations. Legalizing extracts will give the industry a big jolt of much-needed revenue.
#3 – Canopy Just Announced a String of New Deals
While shares have been falling, Canopy has been scoring big wins that will drive revenue growth for years. For example, Canopy just bought a majority stake in one of the largest sports nutrition companies in the world, Biosteel. Biosteel should do close to $3 billion in sales in 2019 – and Canopy will be looking to ramp that up by introducing new lines of CBD drinks. I see major synergy here and I expect it to drive sales growth for years.
Here are some more details from Market Realist.
This acquisition should expand CGC’s product and consumer base, as the company intends to expand its CBD market. BioSteel has a strong sports nutrition consumer base in the North American market, and including CBD (cannabidiol) in its products will be an addition of a new product line for Canopy.
Notably, BioSteel has more than 10,000 points of distribution in Canada and the US. So, this acquisition could help Canopy improve its sales and profitability.
#4 – A New CEO is Coming Soon
Canopy fired founder and long-time CEO Bruce Linton in July. Three months later, Canopy still has not announced a new CEO to lead the company. However, the wait might be ending soon. Interim CEO, Mark Zekulin, recently said Canopy expects to appoint a permanent CEO by the end of 2019 – and that an active search was on.
To me, that means we can expect to hear an announcement at virtually any time. I expect appointing a permanent CEO will be very encouraging to potential shareholders and attract a lot of new interest in shares.
The Big Picture on Canopy and a Potential Rebound
Canopy is struggling through its weakest stretch ever. Shares have closed in the red for five consecutive months. That weakness has been disappointing for current shareholders, however, it has also created a rare opportunity.
Canopy has a proven history of huge rallies after weakness. I think we’re bound to see that happen again.
Disclosure: Michael Vodicka owns shares of Canopy Growth Corp (CGC, WEED) at the time of this writing.
About the Author & Cannabis Stock Trades
Michael Vodicka is an equity analyst with more than 20 years of experience in trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.
Mr. Vodicka brings his expertise and guidance to the members of Cannabis Stock Trades.
Join Cannabis Stock Trades for Mr. Vodicka’s exclusive analysis, trade alerts, and model portfolio.