Market Highs: Canopy Growth stock consolidating into a classic symmetrical triangle
Canopy Growth Corporation (TWMJF)
The technical consolidation reflects the company’s fundamental risk-reward picture — attractive growth balanced by increasing expenses growth and dilution. Revenue, although inorganic, has grown 2X-3X form a low base over the last calendar year; and the large increases in its inventory, as stated in its December 31, 2017, financial report, provides a glimpse of things to come.
Canopy is not only penetrating the burgeoning Canadian medical cannabis markets but is also looking to set up subsidiaries in Europe, Latin America, and the Caribbean.
However, this growth and expansion have come at a cost. Excluding the fair value changes and unrealized gains/losses that impact the cost of goods sold over the last couple of years, adjusted gross margins have narrowed, prompting questions about operating leverage.
Can the benefits from scale and operational efficiencies offset potential price erosion as competition picks up? Also, with R&D and SG&A growing almost as fast as sales, the losses continue, leaving investors with few valuation choices that appear either lofty or risky.
Let’s get into the technical details:
The symmetrical triangle formation is rather obvious. This pattern traditionally marks a period of consolidation, one that indicates a neutral state, perhaps anticipating a breakout (to the upside or downside) as the consolidation range gets increasingly smaller.
Breakouts supported by high volume tend to be more reliable, as such events may be fundamentally-triggered.
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