Pot Stock Presents Favorable Risk/Reward Setup Right Now

The pot stock could benefit from a shift in sentiment

Deputy Editor
May 25, 2021 at 9:21 AM
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Canopy Growth Corp (NASDAQ:CGC) is getting a much-needed pick-me-up this morning, after MKM Partners upgraded its rating on the struggling stock to a "buy" from "neutral." The analyst cited the extremely low sentiment surrounding the stock, calling its current risk/reward profile very favorable. In response, CGC is up 3% at $23.36 before the bell. 

Regarding low sentiment surrounding CGC, MKM Partners isn't wrong. Of the 14 analysts covering the stock, only two called it a "strong buy" coming into today, compared to nine "hold" ratings, and three "sell" or worse ratings. Meanwhile, the equity's 12-month consensus price target of $28.68 is a 26.5% premium to last night's close. 

This hesitancy among the brokerage bunch isn't completely unwarranted. CGC has been cruising lower on the charts since breaking out toward a two-year high of $56.50 in early February. The shares have plateaued just above the $22 level earlier this month though, and still sport a roughly 17% year-over-year lead. Plus, the equity is set to close back above its 10-day moving average, which has put pressure on shares for most of May.

The equity could also benefit from an unwinding of short interest, which climbed 25.6% in the last two reporting periods. The 15.28 million shares sold short make up a solid 6.4% of CGC's available float, and would take three days to cover at its average daily pace of trading. A short-term bounce might already be on the horizon for CGC, too. This is per the stock's Relative Strength Index (RSI) of 35, which sits just on the cusp of "oversold" territory. 

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