3 Unexpected Events That Rescued Canopy Growth Corp (TSE:WEED) From Bear Market Fury

Benjamin A. Smith
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Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1)—and cannabis stocks in general— have been under fire over the past five sessions. The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has entered bear market territory, while CGC and the entire sector complex are getting taken to the woodshed. For many investors, the current environment feels hopeless and daunting. While this predominant sentiment in understandable, it’s also important to realize that such market emotionalism can change suddenly, ushering-in a new trend and new buying opportunities. We highlight three such occasions where unexpected events slayed the bear and brought instantaneous trend change to the market.

October 19, 2015 – Justin Trudeau Wins A Federal Majority Government

Running on a campaign of “Real Change” and tapping into electorate disdain for a Conservative government that had wielded power for too long, the cannabis sector received its legislative champion. On October 19, 2015, the Liberals—lead by Justin Trudeau—defeated a Conservative party that had held office since 2006.

Although every major polling firm showed the Liberals ahead going into election night, the size of the lead varied widely. For example, Forum Research and Mainstream Research showed the Grits ahead 10% and 7%, respectively; however, EKOS published several telephone polls showing the Tories trailing within the margin of error. Prestigious pollster Angus Reid had the Liberals leading by just 4 points on October 15th—four days before the election.

Ultimately, the unexpected part in this equation wasn’t that the Liberals won, rather, their ultimate margin of victory. The Grits snatched 184 of the 338 seats in the expanded House of Commons, giving them a majority and carte blanche to pass any Bill through the legislative branch of government. With Trudeau prioritizing cannabis legalization from the outset, pot legislative prioritization leaped to the forefront.

The reaction in the cannabis public markets—what little of it existed at the time—was swift and decisive. Biggest proxy Canopy Growth initially surged on the result, only to finish lower on the first trading session post-election result. However, that price snafu was only a temporary setback; over the next twelve sessions, Canopy Growth stock soared ↑84.50% on a trough-to-peak basis, snapping the protracted downtrend it had experienced since February. 

TSE:WEED

The cannabis sector finally had the man it needed holding the levers of power to champion its cause. Given the aggressive push back Conservative senators administered to forestall the Cannabis Act in the senate, legalization might never have happened had the Liberals only seized a minority government.

Donald Trump, Cory Gardner strike deal on legalized marijuana

After weeks of sagging performance, HMMJ received an unexpected catalyst—breaking its intermediate downtrend for good. On April 13, 2018, president Donald Trump told a top Senate Republican that he will support congressional efforts to protect states that have legalized marijuana. Specifically, Trump told senator Cory Booker (Rep. – CO) that the Department of Justice’s rescission of the Cole memo will not impact Colorado’s legal marijuana industry. Thus, the administration gave tacit guarantees that legal U.S. states would not be in the crosshairs for contravening federal cannabis prohibition laws.

TSE:HMMJ

Once the news broke, cannabis stocks shot up like a cannon. This is best represented by HMMJ, which appreciated ↑6.47% on the day. It also definitive ended a 5-week long downtrend, which saw prices sink ↓31.55% on a peak-to-trough basis. Although the rally didn’t sustain itself long, it effectively shifted sentiment, promoting the formation of a solid lower-high, which eventually induced further price gains.

Constellation Brands’ $5 Billion Direct-Equity Investment in Canopy Growth

On August 15th, 2018, Canopy Growth and minority stakeholder Constellation Brands supersized their existing relationship, thus transforming the sector forever. Constellation agreed to increase its ownership interest in CGC by acquiring 104.5 million shares directly from Canopy Growth, thereby achieving approximately 38 percent ownership when assuming exercise of the existing Constellation warrants. Furthermore, Constellation was to receive 139.7 million new warrants exercisable over the next 3 years. If over that time frame, Constellation exercises all existing and new warrants, along with its direct investment, its ownership threshold would exceed 50 percent. In essence, the global behemoth had entered into a de facto takeover of Canopy Growth.

NYSE:CGC

And just like the first go-around in October 2017, the market reacted in-kind. Coming of a brutal summer stretch, which saw prices crater ↓32.64% in less than two months, Canopy Growth did an abrupt about-face. Prices gaped-up almost $10/share (30.59%) on massive on-open buying, and never looked back. By the time prices peaked on September 5th, CGC surged ↑129.89% off the summer lows on a peak-to-trough basis.

Final Thoughts

While the cannabis market is downtrodden presently, there’s ample precedent of unexpected events shifting sentiment on a dime. While it’s impossible to fathom which stealthy catalyst lies in-wait, there’s no shortage of potential candidates out there. Everything from transcendent cannibev/cannatobacco deals, to a rapid changing U.S. legislative environment is in play. The aim of the article is not to predict such catalysts, rather, to remind investors that we’re one potential Trump tweet or big deal away from breaking away from the bear’s vice-like grip.

Given CNBC’s penchant for top-ticking and bottom-ticking the market, cannabis stocks may have found their stop-gap.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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