Canopy Growth (NYSE:CGC) stock remains one of my top picks as a long-term winner in the cannabis space. But in the short term, Canopy and other cannabis stocks continue to struggle.
That’s not terribly surprising. Recent fears of the coronavirus from China have rattled the markets. Before that, a slower-than-expected rollout of recreational products in Canada led to disappointing growth — and a massive selloff in cannabis names.
But even the recent volatility provides an opportunity. As regular readers of my Cannabis Cash Weekly know, we’ve been selling covered calls on CGC stock and other cannabis plays. Higher volatility means higher premiums — and higher returns.
Nimble trading can create opportunities in almost any environment. With Canopy Growth earnings due on Friday morning, investors need to stay on their toes.
Two Big Days for Cannabis Stocks
Since stabilizing in November, cannabis stocks have tried to rally. I use the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) as a proxy for the sector. After bouncing in January, that exchange-traded fund once again is testing short-term support:
The ETF actually sits a few pennies below November lows. That’s not enough to predict another leg down for the sector — yet. But certainly sentiment toward the sector remains bearish.
Two industry leaders have a chance to reverse that sentiment this week. Aurora Cannabis (NYSE:ACB) reports earnings on Thursday morning, and Canopy the following day.
It remains to be seen whether the two companies finally can drive optimism toward the sector. “Cannabis 2.0” products in Canada represent a significant growth opportunity, and should contribute modestly to fourth-quarter results. Earnings reports last month from Aphria (NYSE:APHA) and OrganiGram (NASDAQ:OGI) led the sector to bounce. There’s hope for a repeat this week and next.
But there are reasons for caution as well. Aurora has laid off workers. Canopy announced that its cannabis-infused beverages would be late to market. Neither move suggests blowout earnings are on the way. And so investors waiting for a big rally in cannabis names may have to wait a little longer.
The Long-Term Case for CGC Stock
Of course, that’s not a bad thing. My longer-term outlook toward cannabis is extremely bullish. But investors need to pay attention to short-term factors as well — and capitalize on them.
So we’ve looked to sell covered calls on CGC stock. The strategy results in either positive short-term gains if the stocks are called away, or a reduced cost basis if they’re not.
Covered calls allow investors to play the short-term trading we’ve seen in recent months while maintaining flexibility toward the long-term opportunity. And from a long-term standpoint, Canopy Growth remains the stock to own.
The multi-billion dollar investment from Constellation Brands (NYSE:STZ, NYSE:STZ.B) gives Canopy a sizable war chest. It’s also allowed Canopy to develop a vertically integrated model that spans everything from production to retail.
Brands like Tweed and Tokyo Smoke will drive consumer sales with higher profit margins. Spectrum Therapeutics offers exposure to worldwide growth in medicinal marijuana.
Simply put, Canopy Growth is the industry leader in an industry that will, over the long term, grow exponentially. Investors can’t ask for anything more.