Canopy Growth Corp. (TSX:CGC) had an outstanding 2016, but for those who were late to the party, the downside was huge. The volatility has begun to calm down as we head into 2017, but is the stock still a risky play given the huge growth potential offered by the stock?
The company has the potential to soar again this year, but I believe the stock has a greater probability of correcting by 50% or more this year due to headline risk. There’s no question that any small piece of negative news will send the stock into the abyss because there are a ton of short-term traders still in the stock at these levels.
Canopy shares are $9 per share, which is still ridiculously expensive, and all it will take is one small rumour for all the dominoes to start falling. In the short term, I believe the party is over. There will be no easy gains this year, and we could see the stock price fall back to reality. Marijuana investors are overly optimistic, and that is priced into the stock right now. If more good news comes out regarding marijuana regulation, then I don’t see Canopy or any other marijuana stocks rallying by the amounts we saw last year.
Another reason why I don’t like the stock right now is because even if there’s no news about Canopy or marijuana stocks, the stock of Canopy will continue to fall by default.
Let’s face it. The stock is for speculative traders only right now, and it doesn’t make any sense to consider the stock as a long-term hold right now. It’s just too dangerous considering the fact that traders will be quick to sell if they don’t see green in the day-to-day movements of a stock. If nothing happens or nothing new is released on the stock, then we’ll see a slow and steady fall in the stock price. I believe this is what we’ve seen for the past two months.
It doesn’t make sense to value the stock based on traditional valuation metrics, and there’s no margin of safety at current levels. For a value investor, it just doesn’t make sense to own the stock at these levels after the fantastic run the stock had last year. There’s a greater chance of losing your shirt than there is to profit off the stock this year.
If you’re bullish on the marijuana industry and want to get a piece of the action, then just wait on the sidelines. The stock will most likely continue to fall this year, and once the traders are weeded out, then you can start buying the stock. But make sure you buy in small increments on the way down to minimize your risk. With the large amount of volatility in this stock, it’s a wise move to increase your exposure.
Never buy a speculative stock like Canopy all at once. Buy it in small chunks, and buy more as the stock goes down. This way you won’t panic as the stock falls. You can simply lower your average cost basis by slowly adding to your stake.
The company may be growing like a weed, but that doesn’t mean the stock will too in 2017.
Stay smart. Stay safe. Stay Foolish.
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Fool contributor Joey Frenette has no position in any stocks mentioned.