Why Short Sellers Are Afraid of Canopy Growth Corp (TSX:WEED)

Short sellers are running away from Canopy Growth Corp (TSX:WEED)(NYSE:CGC) as fast as they can.

| More on:
caution

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you’d shorted shares in Canopy Growth (TSX:WEED)(NYSE:CGC) on August 14, you’d be in a world of pain today. After news that Constellation Brands was about to invest $5 billion in the company, Canopy went on an epic month-long rally and is still up over 100%, despite losses earlier this week.

Fortunately, it appears that most who were short Canopy in August got out early. According to data from IHS Markit, short positions in Canopy fell after the news of the big acquisition was announced. On August 15, there were approximately 19 million Canopy shares short. By August 30, that figure was sitting at 11.2 million — down 8.1 million from the August peak.

So, why are investors so wary of taking short positions in Canopy?

First, we should look at the risk associated with shorting in general.

Short-selling risks

Short selling is a way to take a “negative position” in a stock. It works like this: you borrow a stock you want to bet against, sell the shares right away, wait for the stock price to fall, then return them at the new (ideally lower) price.

Why is this so risky?

It’s quite simple: when you buy a stock, unless you buy on margin, the worst that can happen is it goes to zero and you wind up with worthless shares. If you spent $1,000,000 on stocks that fell to nothing, that would be quite a loss, but you wouldn’t be in debt. But when you short a stock, there’s no “floor”: the more the stock goes up, the more you ultimately owe. So, you could find yourself in a position where you owe more on a short sale than you have in total assets. In this situation, you’d have to borrow money to cover your loss.

Why Canopy is a bad short

Canopy is a classic example of a stock that you should not short. I’m not saying that because I think it’s a great stock or that it will go up indefinitely. Rather, I’m saying it for one simple reason: Canopy is an extremely volatile stock.

Volatility is a measure of risk and refers to how much a stock swings up and down over time. Volatility is measured with a metric called beta. A beta lower than one indicates low risk; a beta higher than one indicates higher-than-average risk. Currently, Canopy has a beta coefficient of 2.52 — more than double the market average. That means that this stock tends to swing dramatically up and down over time. High-beta stocks are bad for shorters, because a dramatic upward spike — like Canopy’s big August rally — can put them severely in debt very quickly.

Another factor that makes Canopy a bad short play is its media cachet. This is a company that gets a lot of media coverage, and it’s often positive. While shorters might look at the company’s negative earnings and think it’s a clear dud, enough media hype can keep a financially unhealthy stock trending up for a long time. And with legalization coming on October 17, we can expect more positive media coverage for Canopy.

Should you invest $1,000 in Canadian National Railway right now?

Before you buy stock in Canadian National Railway, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Canadian National Railway wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

a man relaxes with his feet on a pile of books
Investing

Got $7,000? How I’d Spread It Across 5 Blue-Chip Stocks for an Investing Foundation

Spreading $7,000 across these five blue-chip stocks provides a solid foundation for long-term financial success.

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

How I’d Allocate $10,000 to AI Stocks in Today’s Market

Shopify (TSX:SHOP) is one of Canada's most compelling AI stocks.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Retirement

Top Canadian Value Stocks I’d Hold in My TFSA for the Next Decade

These Canadian value stocks have significant growth potential and will enhance your TFSA portfolio’s return in the long run.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »