One of the few sectors exhibiting relative strength is the cannabis stock sector. We tipped this one as a potential candidate for the top 3 most profitable markets in 2019. If this forecasts materializes it will exceed our already bullish Cannabis stocks Canada forecast 2019. By looking closely at the cannabis sector leader Canopy Growth (WEED.TO) we identified 10-bagger potential for 2019. This has implications for the whole sector as multiple cannabis stocks might become 10-baggers in 2019.
Let’s first recap the message from last week’s post Canopy Growth near all-time highs, this is the message to investors because the current article builds upon it:
To us, the message is crystal clear: the cannabis sector shows relative strength during market turmoil, and is the first to recover aggressively. This is where investors want to put their money. Because of this we believe that the cannabis sector might qualify as one of the top 3 investment opportunities of 2019.
Moreover, not only Canopy Growth, but one of our favorite plays Emerald Health Therapeutics might have 10-bagger potential (EMH.V).
We first look at some additional fundamental evidence that underpins our thesis that the cannabis sector might bring 10-baggers in 2019. We will followup with one specific chart that might suggest the 10-baggers are already underway.
Cannabis investing fundamentals set the stage for 10-baggers in 2019
MarketWatch published an interesting piece this week about the supply/demand of the cannabis market. It also indicated, in this piece, to which market value the cannabis sector may grow short and longer term. It is based on research of Piper Jaffray.
Piper Jaffray is expecting the global cannabis market to be worth $250 billion to $500 billion a year in the long term and to be worth $15 billion to $50 billion in the nearer term.
These are staggering growth figures. It’s a factor 10 growth we are talking about. Yes, this implies 10-bagger cannabis stocks in the making.
This is not only recreational cannabis but also for medical purpose. Specifically, the CBD-infused products have nonpsychoactive ingredients that are held to have wellness benefits.
Piper Jaffray likes Canopy Growth in particular.
Canopy’s recent success in receiving a legal hemp license in New York is “a tangible first step forward in the U.S. that points to the beginning of a long US growth trajectory,” said the note. The company has not yet selected a site but is expecting to invest up to $150 million in the Empire State. New York Gov. Andrew Cuomo unveiled a plan to legalize recreational marijuana last week.
“Canopy has hemp-specific IP, cash reserves, and technical expertise that should position it well in the U.S. hemp and CBD market,” the analysts wrote. “Though we do not yet have more specifics on its plans, we believe this tangible step into the U.S. is a clear positive and makes us more bullish on its outlook for sustainable growth.”
Cannabis investing technicals underpin 10-baggers in 2019
What does this mean for the technicals of the cannabis sector?
In order to answer this question we turn our attention to the weekly chart of Canopy Growth, the sector leader.
What we try to do is look for the upside potential. That’s justified, also from a risk management perspective (which requires to also consider the downward potential first) because of the strong and perfect uptrend of this market.
In determining the upside potential we look for the top of the rising channel which is shown on chart below. By calculating the potential we look at 2 timeframes: first part of 2019 vs second part of 2019.
- If Canopy Growth would rise fast in the coming months it would have as an upside target of 140 to 160 CAD in the period April to June.
- If Canopy Growth would rise slowly, and only accelerate after the summer of 2019, it would have as an upside target of 208 to 270 CAD in the period July to December.
The price of Canopy Growth in the first week of January was 33 CAD. Assuming that it will peak in the 150 to 250 area in 2019, provided the current uptrend continues and a breakout above all-time highs takes place, it might lead to a 7-fold rise in 2019 (median between 150 and 250).
How realistic is this, and when will this upside potential not materialize? The probability is high. It will not materialize is markets go south, and break below the levels indicated in our 15 leading indicators overview and if Canopy Growth does not succeed breaking through all-time highs.