Canopy Growth (NYSE:CGC) stock is set to fall further. Since my last article on CGC stock on Oct. 9, nothing much has changed. The losses at Canopy are continuing.
In fact, Canopy Growth stock has fallen another 10% to $20.37 per share. In addition, short positions in CGC stock, along with other cannabis stocks, have increased.
Short interest in Canopy Growth stock between its listings on the New York Stock Exchange and the Toronto Stock Exchange is at 25%. This is up from 14% in January. And this is after the stock has already fallen over 60% from its 52-week high in May.
What does this mean? Well, 25% of the outstanding shares of the company have been sold short and not closed out. It is a market sentiment indicator of what a large group of holders thinks about the shares.
Short Interest in the Float Is Even Higher
This actually does not tell the whole story. Constellation Brands (NYSE:STZ) owns 104.5 million shares (plus some warrant tranches) of Canopy Growth stock. On Nov. 1, 2018, over a year ago, it paid $5 billion CAD for those shares and warrants. CGC has 339.7 million shares outstanding. That means STZ owns 30.8% of CGC stock (104.5 million divided by 339.7 million).
But it also means that the short interest is actually higher than the 25% mentioned above. If you take the short interest and divide it by the net float (after deducting the STZ stake) the ratio increases.
For example, the short interest is 25% of 339.7 million shares outstanding or 84.9 million shares. The actual trading shares, or “float,” is 235.2 million shares (339.5 million minus 104.5 million). So the short interest in the float is 36% (84.9 million divided by 235.2 million).
Over one-third of the stock is with investors betting on a continuing decline in Canopy Growth stock. Watch out below.
Losing Money
Canopy Growth’s problem is it is mired in losses. I pointed out in my last article that CGC had $148 million CAD in operating losses and $468 million CAD in investing losses in its June quarter.
The short sellers believe Canopy Growth stock won’t turn around since the company can’t seem to turn a profit, even with the Constellation Brands money.
In fact, Barron’s wrote that Constellation Brands was so sick of the losses that it took action. Canopy’s former CEO Bruce Linton was sacked.
So far, nothing has happened to indicate the company is turning around. Canopy Growth will report its September quarter results on Nov. 14. All eyes will be on the bottom line then.
Cash Balance Doesn’t Matter if Losses Continue Rising
InvestorPlace’s Will Ashworth wrote in his latest article on Cronos (NASDAQ:CRON) and other cannabis stocks that investors should use other metrics. They should look at the high net cash balances in Canopy Growth stock compared to its market value.
The problem with this approach to looking at CGC stock is that the cash burn lowers the cash balances each quarter. So, there is nothing to push up the market value if the cash balances decline.
That is why the upcoming financials are so important. The problems with the cannabis industry may be so fundamental that even the new CFO and CEO cannot turn the company around. At that point, the high cash balances don’t matter. The cash burn will keep drawing the cash on hand, dragging CGC stock with it.
For example, falling cannabis prices and the black market — which is undercutting the legal market — may be the basic reason why cannabis companies can’t turn a profit.
The Bottom Line on CGC
At this point, I would wait until there are clear signs that Canopy Growth can produce a cash flow profit, not just a net income profit.
If the Constellation Brands management team cannot turn Canopy into a profit-making company, there is really no reason to buy the stock.
As of this writing, Mark Hake did not hold any of the aforementioned securities.
