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Josh Enomoto

Why Are Canopy Growth (CGC) Options Soaring? It’s Politics, Baby!

Americans are good at detecting what I would term bovine scatology. So, I think it’s unnecessary to add to the long pile of it when it comes to cannabis operator Canopy Growth (CGC). It may be a fine enterprise as it attempts to write a comeback narrative. However, the rise in CGC stock – and its underlying options market activity – is likely not based on its robust financials.

No, this is all about politics. To say otherwise goes against some weighty data.

First, one just needs to look at the market performance. Yes, from certain angles, CGC stock looks absolutely incredible. In the business week ending last Friday, Canopy saw its equity value more than double. Since the start of the year, CGC swung up 60.54%. That’s looking more like an artificial intelligence play than an embattled cannabis operator attempting to regain credibility.

However, in the past 52 weeks, CGC stock is still down almost 60% despite the recent stratospheric performance. Over the past five years, CGC lost more than 98%. Longtime stakeholders aren’t going to quickly forget that.

Second, analysts aren’t exactly enthused with Canopy, rating its equity a consensus moderate sell. Just three months ago, the rating was a hold. Further, the mean price target sits at $4.19. From Friday’s close of $7.69, this represents a downside risk of about 46%.

Third, the financials themselves are not encouraging. Yes, one could make the argument that with CGC stock trading at a trailing-year revenue multiple of 1.36X, Canopy may appear cheap. However, the problem with this argument is that since fiscal 2021, the company’s sales have been declining.

So, what’s the catalyst behind CGC stock? It comes down to politics. According to Barchart content partner The Motley Fool, Canopy – along with other cannabis operators – have soared following Vice President Kamala Harris’ call for marijuana to be decriminalized as quickly as possible.

Financially, decriminalization – or more specifically rescheduling – could potentially expand Canopy’s total addressable market. Subsequently, we’re seeing a dramatic interest in its derivatives market.

CGC Stock a Key Highlight Regarding Unusual Options Activity

When the closing bell rang out on Friday, CGC stock slotted into second place in terms of unusual stock options volume. Specifically, total volume reached 200,755 contracts against open interest of 423,792 contracts. Monday’s volume represented a 983.94% increase over the trailing-month metric.

Drilling down, call volume hit 146,980 contracts versus put volume of 53,775 contracts. On paper, this pairing yielded a put/call volume ratio of 0.37. While that sounds incredibly bullish, investors should consider the nuance of this print.

Looking at Barchart’s options flow screener – which exclusively filters for big block transactions likely made by institutions – many of the calls are likely major traders selling them. In other words, they represent wagers that CGC stock won’t rise above the listed strike prices.

Notably, the sold call with the highest volume level (not including options that expired on Friday) was the Apr 19 ’24 8.00 Call, which featured volume of 5,788 contracts against open interest of 2,976. This $8 strike price is significant because according to Barchart’s Trader’s Cheat Sheet for Canopy, major resistance begins at $8.49 and runs to $12.23.

Therefore, investors should exercise caution about jumping aboard CGC stock in the hopes that the current week will yield a similar return to last week. Another headwind stems from the other sold calls, which feature strike prices from $7.50 down to $4.50. That’s not exactly encouraging as it suggests current investors may end up holding the bag.

If that wasn’t enough, Friday’s afterhours session saw CGC stock dip to $7.30, which represents a 5% loss. With the available data at hand, it would arguably be more prudent to wait for the choppiness to subside before entering a position.

Still, over the intermediate term (meaning before the 2024 election), Canopy Growth stock could be a compelling – albeit incredibly speculative – opportunity.

Political Backdrop Could Lift Canopy Growth

President Joe Biden has a popularity problem. No matter how much he points to the robust recovery from the COVID-19 crisis, the residual aftershocks of the pandemic – particularly elevated consumer prices – have made his administration a target for opposition criticism. That’s a harsh indictment considering that former President Donald Trump isn’t exactly a squeaky-clean candidate.

However, one issue could change the dynamic: the rescheduling of cannabis along with pardons for individuals caught with low-level possession.

Fundamentally, the voting public – particularly young voters – would likely be swayed by Biden’s practical approach to the cannabis situation. Second, with rescheduling, people who would otherwise have their civil rights removed have them intact. Along with the pardons, these factors could add to Biden’s electoral tally.

Cynically, because Trump has been so aggressive on issues of law and order (especially with border control), it would be tougher for him to sell the legalization message to fellow Republicans. Further, the rescheduling angle could better sway independents to vote for Democrats.

These are the elements likely working in favor of CGC stock, not its financials.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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