Canopy Growth Corporation

Summary: Canopy Growth Corporation (Nasdaq: CGC, TSX: WEED) is a Canadian-based Cannabis company, with some international operations, mostly through their subsidiaries Acreage Holdings, Wana Brands, and Jetty Extracts.

 

Stocks in this industry are inherently extremely risky and are subject to legislative risk to a higher degree than many other U.S listed stocks. In the U.S, despite still being illegal at the federal level, cannabis is legal for recreational purposes in 24 states and for medical purposes in an additional 14.

 

The stock is down approximately 99% from its all-time high, with a market capitalization of just under $600M today and a peak market cap of approximately $19.5B.

 

 

Despite this significant decline and shareholder dilution over the last several years, the company has still been able to generate revenue and has had growing profit margins. And although their profit doesn’t yet carry down to the bottom line, the market opportunity appears to be becoming more and more visible. Germany recently legalized recreational cannabis and even in the U.S, the DEA is holding a hearing on December 2nd to discuss reclassifying the substance to schedule III. Although this is of course subject to the bureaucratic process of government and there may be certain political motives going into an election, it seems the U.S is closer than it ever has been to reclassifying the substance. Even if the U.S does not reclassify it, or the process gets delayed, it is still legal in most states and there is a growing international market.

 

On top of that, there is a technical aspect to it. The price level now is very near its lows from 2016 and 2017 and, in the last 12 months, there have been two instances where the price level increased by more than 5x in a matter of weeks. Both instances were on news of potential reclassification in the U.S, but the stock gave back most of the gains both times while the DEA dragged their feet on updating the status of Cannabis.

 

 

Just yesterday (August 27th), the DEA announced they are postponing the reclassification until after the election and have a hearing scheduled on December 2nd to discuss the benefits and risks in detail. This caused a major selloff in CGC and other cannabis stocks yesterday, with CGC closing down almost 10% and MSOS down over 13%. This clearly was not good news, but the fact remains that there is potential for an update within a few months and even without the U.S market, there is growing demand internationally.

 

Even with all of the above, what makes this opportunity more appealing is what appears to be dirt cheap long-dated call options.

 

CGC January 16, 2026 Call Options

CGC January 16, 2026 Put Options

 

The implied volatility of the call options with the January 2026 expiration are substantially lower than that of the corresponding puts. Normally, market participants would arbitrage this out by shorting the stock, buying calls, and selling puts, but this is not always possible due to the cost of borrowing a security that is in high demand to short. This can also be due to extreme negative sentiment and the expectation of a major downside move, or protection against a potential major downside move. Although this might not instill a lot of faith for a long position, it is actually a classic contrarian setup. It is bearish sentiment that may already be accounted for in the underlying stock – if market participants were scared of a downside move, they would’ve already sold, and if all the people who wanted to sell already sold, then that would leave no one left but buyers.

 

There is also substantially higher open interest on the call side, mostly in the out-of-the money contracts. Taking the $10 and $12 strikes as examples, there is a total of 19,785 contracts open, which represents notional exposure to 1,978,500 shares or approximately $10.5 million worth of stock using today’s closing share price of $5.20. It seems highly unlikely that any sellers of these options would be selling them on a covered basis and appears far more likely that they are being sold naked. After all, why would anyone risk holding the underlying shares in such a binary situation when the amount they would be taking in as premium is such a small amount for over a year’s worth of risk? This may be a way for some traders to get a small amount of negative delta (short exposure) without having to short the stock outright and pay exorbitant borrow fees or buy the overpriced volatility in the put options. This does leave any naked call sellers to open-ended risk though if the stock were to pop at anytime until their expiration. We already know that when the stock moves up, it has historically done so in quick and massive moves. It is possible that this can trigger something very similar to a traditional short squeeze, as those holding naked call positions must cover their positions by buying the underlying stock, pushing it higher, or buy back their short call options themselves, pushing up the price of the call options.

 

If we were to see another 400% gain from current levels, the stock price would be approximately $26.45. If the stock were to reach this level in the next 15 months, the $10 strike call options would see a return of nearly 20x (using today’s $0.83 offer). We realize it is a bit aggressive to simply throw out a historical price multiple to make our point, but let’s not forget that this has happened twice in the last twelve months and there are 15 months until expiration, with significant developments expected within that timeframe, including a presidential election, a DEA hearing on the potential reclassification of Cannabis, and the joining of a new Chief Executive Officer to the company, although it is yet to be determined exactly who.

 

As far as fundamental valuation ratios go, common P/E multiples don’t have much use because many of these companies, Canopy Growth included, do not yet have consistent net income. A better approach might be to use a historical Price-to-Sales ratio though because they do have regular revenue and analyst estimates covering the next 12 months of expected revenue. CGC’s P/S multiple (using NTM data) is still near an all-time low, although it is slightly off its true low from late 2023 and early 2024. At its peak in 2018, this ratio exceeded 68x, demonstrating the bandwidth of price to expected sales. We are by no means suggesting that this stock should trade for 68 times sales, or even half of that, we are simply demonstrating the massive bandwidth of these multiples, and this comes at a time when forward revenue may be expected to increase with the recent German legalization and potential deregulation in the U.S.

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