Cannabis Firm Faces Make-or-Break Moment
It would be easy to call 2019 a bad year for cannabis investors.
The very best cannabis stocks got clobbered in 2019.
Moreover, 2019 marked the first time we’ve seen a publicly traded cannabis company declare bankruptcy.
But counter to what you may be thinking, that means we’re looking at one of the best times in history to be a cannabis stock investor.
While 2019 was a tumultuous year for pot stocks, it was a year of amazing milestones for the cannabis industry:
- Illinois signed a recreational marijuana bill that went into full effect Jan. 1, making it the 11th state to fully legalize cannabis
- The House passed cannabis banking reform
- “Cannabis 2.0” kicked off in Canada, dramatically increasing the number of legal pot-derived products on the market in North America
- Scores of jurisdictions decriminalized cannabis legislatively
- A handful of pot companies graduated from over-the-counter trading status to major U.S. stock exchanges.
Even though last year was tough for cannabis stocks, the swath of new legislation and markets is great for the space.
Disconnected Pot Stocks
It’s fairly uncommon to see such a big disconnect between stocks and the firms they represent. But it happens. And when it does, it often represents a massive opportunity.
The biggest problem in 2019 was the fact that investors treated all pot stocks the same.
But there’s a huge disparity between the best and worst operators in this growing industry. I’ve made no secret of the fact that I think we’ll see many more pot companies fail than succeed. But that’s OK in my book.
The worst-run companies deserve to go bust. And when that happens, we’ll see investors start to get more comfortable putting money behind quality companies again.
In many ways the 2019 drawdown was expected after such a significant run-up for most pot stocks. And while the ebb in cannabis share values has lasted longer than most would’ve guessed, it’s less jarring considering the longer-term context.
And psychologically, a new calendar year often comes with a sort of mental “reset” for investors. Some good news for the space could help start turning things around for cannabis.
Speaking of positive cannabis news…
Major Cannabis Player Faces a Make-or-Break Moment
Constellation Brands Inc. (NYSE: STZ) reported earnings this morning. STZ forced its way into the cannabis space in 2018 year by acquiring a 38% stake in Canopy Growth Corp., one of Canada’s largest cannabis companies.
At the time, Wall Street and Main Street investors applauded the move, but the pressure 2019 put on pot stocks weighed on STZ shares significantly, making this morning’s call a highly scrutinized one.
Here are the raw numbers from STZ’s call. Earnings per share came in at $2.14 beating Wall Street’s estimate of $1.85. Revenue came in a little better than expected as well at $2 billion versus the estimated $1.955 billion. The company also raised its forward guidance as impact from the drawdown in Canopy Growth shares begins to wane.
Speaking to our resident trading expert Greg Guenthner, he notes STZ is now at a make-or-break moment.
Greg explains that when looking at the chart we can see a very prolonged bull run (blue line) from 2012 up until late 2018. Since then, STZ has consolidated and coiled into a compressed trading range between $160 and $200 (red and black lines).
It’s make-or-break time for STZ shares. If you’re fundamentally bullish, Greg notes now is a good, low-risk entry point. Based on the recent price data, those who enter now would just need to keep an eye out for any movement below $160.
This would represent a fundamental breakdown that could get a lot worse but also give you the chance to bail before taking too many losses.
If, however, coming out of earnings today, we see STZ shares make strong moves toward $200 or higher, the next move upward could be a big one.
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Chief Technology Expert, Technology Profits Daily