Canopy Growth Is Hot, and Here's How I'm Trading It
Light 'em up? Interesting. That's how I see this. No interest in the product. I'm the guy who tends to make things worse by taking myself off of my prescriptions before my doctors want me to. I am, however... very interested in making money, so voila... here I am. Canadian cannabis provider Canopy Growth (CGC) went to the tape with the firm's fiscal third quarter 2021 results on Tuesday morning. This is going to be sloppy, as the information reported is complex in nature, and let's not forget this is a Canadian firm, so these are Canadian dollars that we'll be talking about. Currently $1.00 US buys about C1.27.
For the quarter, Canopy Growth reported EPS of C-2.43 versus C-0.26 reported for the same period one year ago. The results do not appear to be comparable. Revenue generation was however, not a problem. The firm posted sales of C169.9 million, which was a new record. After deducting excise taxes of C17.4 million, the firm was left with net revenue of C152.5 million. The growth in this business has been in oils and softgels infused with CBD. The larger, dry bud business has been more or less stagnant, which is why the firm is so excited about the deal to distribute the Martha Stewart CBD collection at retail locations including the Vitamin Shoppe chain. Dry bud sales actually contracted 4% to C66.2 million in Canada for recreational users, while also contracting 2% to an even C9 million globally for medical use. The oil and softgel business however, saw sales increases of 55% to C7.3 million for recreational Canadian use, and 11% to C27 million for global medical use.
Need To Know
The very large loss per share amounts to an operating loss of C553.6 million, and subsequently a net loss of C829.3 million. The huge losses were driven primarily by impairment and restructuring charges among other charges that came to C416 million. Investors will recall that back in early December, Canopy announced the closing of five production facilities across Canada that amounted to 100 of the firm's outdoor Canadian footprint, and 17% of the firm's enclosed Canadian footprint. In all 220 employees were impacted. The majority of the operating loss is due to the implementation of this plan, that in the end is intended to expand margin going forward.
Guidance is better, but one must understand that this is kind of like trying to turn a battleship by sticking an oar in the water. It's going to be tough. The firm sees net revenue CAGR (compound annual growth rate) of 40% to 50% from FY 2022 to FY 2024. The firm also sees positive adjusted EBITDA by the second half of FY 2022, and 20% adjusted EBITDA margin for full year FY 2024. Lastly, the firm sees positive operating cash flow for full year FY 2023, and if you believe all of that.... positive free cash flow for full year 2024.
The Chart
Okay, let me get this straight. The firm basically kitchen sunk everything in order to begin anew. They really do not have very high hopes for the short to medium term future. Yet, the market buys this news. You see that Relative Strength Index reading of 78? Yeah, this stock is badly overbought from a technical perspective. I might just short the stock, but wait... at last glance more than 35% of the entire float is held in short positions. I've seen that movie before... the one where a swarm of retail traders with no knowledge of fundamental analysis try to take a handful of hedge fund managers with absolutely no risk management skills whatsoever to the cleaners, and both sides lose. No thank you.
The Trade (minimal lots)
- Purchase one CGC March 19th $45 put for about $4.80.
- Sell (write) one CGC March 19th $35 put for roughly $1.10.
Net Debit: $3.70
Notes: The trader is buying the right to sell 100 shares of CGC at $45 by the March 19th expiration. In order to partially subsidize the expense, the trader sells the right to sell 100 shares of CGC at $35 by the same expiration date to someone else. In other words, net potential profit is capped at $6.30 {$10 - ($4.80 - $1.10) = $6.30}.
By The Way...
Unrelated name, related business. Tilray (TLRY) has also been hot of late, and gapped higher on Tuesday morning on news that an agreement had been reached with Grow Pharma in the UK to import and distribute Tilray products.
Not only badly overbought, now there is also a gap to fill. Just an FYI... 22% of the entire float is held short, so we are not going to short the equity. Another perfect candidate for a bear put spread as in the above example. Tilray has not yet announced an earnings release date for this quarter. History suggests the first week of March is likely.
At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.