Like the cannabis sector in general, Canopy Growth (CGC) trades near multi-year lows. At the current price of $22.75, the stock isn’t the favorite in the sector, but the deal to buy Acreage Holdings (ACRGF) in the future offers a backdoor play into Canopy Growth at a substantial discount to current market prices. The recent inside purchases of the Acreage CEO should highlight the clear path for investors to follow.
Acreage CEO Insider Purchases
In the last week, Acreage hit new lows in the $6s. Amazingly, the U.S. multi-state operator (MSO) traded at $30 in the last year.
The cannabis stock is so out of favor that a premium right to purchase on the books from Canopy Growth isn’t helping the stock. For this reason, the open market stock purchases by Chairman and CEO Kevin Murphy are very meaningful.
On October 8, the CEO bought an additional 100,000 shares at an average price of $6.85 per share for a total purchase price of $685,000. Mr. Murphy has previously bought another 154,000 shares back in July for a total purchase of 254,000 shares.
Canopy Growth Path
The best part of a long-term investment in Canopy Growth is that the company has the best balance sheet in the business with a cash balance of $2.3 billion. The large Canadian LP can survive any prolonged downturn in the business and would benefit from some reduced competition in the cannabis space.
The opportunity here is for investors to buy Acreage with a likely path to convert those shares into Canopy Growth shares at a far better price. Once cannabis is federally legal in the U.S., Canopy Growth will close their right to acquire Acreage based on the merger agreement.
The deal is for Acreage shareholders to obtain 0.5818 shares of Canopy Growth for each share owned. With Canopy Growth trading at $22.75, Acreage would have a conversion value of $13.24 or 95% upside from the current stock price of only $6.80.
In the meantime, an investor owns a U.S. MSO busy integrating Canopy’s IP, brands, and technologies across their U.S. operations. Despite licenses or consulting contracts for operations in 20 states, the stock has a listed market value of only $800 million while analysts expect the company to top 2020 revenues of $430 million.
The main reason the stock offers such a large premium on closing of the Acreage deal is that the U.S. MSO stocks have generally become very cheap. Vaping concerns, regulatory approval questions and capital fears have all become drags on the sector still in major growth mode.
Overall, Canopy has had 10 bullish analysts in its corner over the last three months, with 6 analysts playing it safe on the sidelines. The 12-month average price target of $36.36 showcases 76% in upside potential for the stock. (See Canopy stock analysis on TipRanks)
The key investor takeaway is that Acreage Holdings offers a very cheap way to enter into a position in Canopy Growth. The large Canadian LP has numerous challenges in the current market environment where the company spent wildly for a global cannabis market that hasn’t fully developed yet, but the company has the cash for the long term. The current merger value has Canopy Growth only worth about twice the cash balance.
An investor in Acreage obtains a cheap stock and immediate upside on federal approval of cannabis while benefiting from the protection of the large cash position of Canopy Growth. CEO Kevin Murphy has signaled the time to buy the stock is now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.