After their parabolic 2018 gains, cannabis stocks have been far from smoking hot over the past year, with leading industry players plagued by supply issues, high taxes. and ongoing regulatory hurdles.
However, as we move into 2020, some of these challenges look to be clearing up. Government authorities in Canada – the first developed country to legalize recreational cannabis use – continue making progress working through cultivation and sales license application backlogs. Furthermore, in December, the country approved the launch of cannabis derivative products, such as edibles, vapes, and infused beverages, which should propel sales.
Meanwhile, in the United States, 33 states have legalized cannabis for medical or recreational use, with the House of Representatives even passing a bill in September that would allow legal marijuana businesses to access banking services. The legislation must, however, still receive Republican support in the Senate.
From a technical standpoint, brand-name pot stocks have rallied above multi-month downtrend lines in January, indicating improving sentiment in this burgeoning industry. Below, we take a closer look at two Canadian cannabis stocks as well as a marijuana-themed exchange-traded fund (ETF).
Cronos Group Inc. (CRON)
Toronto, Canada-based Cronos Group Inc. (CRON) cultivates and markets medicinal and recreational cannabis. Last year, the $2.47 billion company acquired several units of Redwood Holding Group, LLC – a maker of hemp-derived CBD-infused skincare and other products – to push its cannabidiol (CBD) products into the U.S. market. As of Feb. 19, 2020, Cronos stock has tumbled 66% over the past year, but it is trading 17.43% higher since late November.
Cronos shares broke above an eight-month downtrend line on heavy volume in early January but promptly retraced back to the breakout level as buyer enthusiasm waned. The price has since rallied from trendline support to close above the 50-day simple moving average (SMA) and a mini falling wedge pattern – a formation that typically predicts higher prices. Those who buy here should place a stop-loss order beneath the February low at $6.57 and anticipate a move to overhead resistance at $11. Manage risk by amending stop orders to breakeven if price climbs above the 2020 high at $9.
Canopy Growth Corporation (CGC)
Canopy Growth Corporation (CGC) produces, distributes, and sells cannabis in Canada through two business divisions: Cannabis Operations and Canopy Rivers. During its latest earnings call, the company said that it has a 22% market share in the retail Canadian recreational market, with sales boosted by strong demand for its premium and value-priced products. Canopy stock has a $7.80 billion market capitalization and sports a year-to-date return of 4% as of Feb. 19, 2020.
Canopy shares ended their steep downtrend in mid-November with a bullish engulfing pattern that now forms part of an inverse head and shoulders formation. The company's better-than-expected quarterly results fueled a rally from $20 – an area on the chart that finds support from the bottoming pattern's right shoulder and a trendline extending back to late April. Traders should think about setting a profit target close to horizontal line resistance at $29 while protecting downside with a stop situated below the 50-day SMA.
ETFMG Alternative Harvest ETF (MJ)
Launched in 2015, the ETFMG Alternative Harvest ETF (MJ) aims to provide a similar return to the Prime Alternative Harvest Index by investing its $731.45 million asset pool in securities that make up this tracked benchmark. The fund's top three holdings in a basket of around 40 stocks include Canopy Growth, GW Pharmaceuticals plc (GWPH), and Cronos Group. An average 0.19% spread coupled with a daily turnover of more than 1 million shares make the ETF a popular choice for traders who seek exposure to the space. The fund, which offers an attractive 5.45% yield and charges a 0.75% management fee, has fallen 4% since the start of the year as of Feb. 19, 2020.
After months of trending lower, the ETF's share price appears to be carving out a possible double bottom, with the November and January swing lows both forming at similar levels. Those who take a long position should book profits near $23, where price may encounter resistance from the August swing low and 200-day SMA. Consider cutting losses if the fund's price fails to hold above $15.65, as this would invalidate the double bottom set-up.