Incoming Canopy Growth (NASDAQ:CGG) Chief Executive David Klein certainly has his work cut out for him. Until he can get Canada’s largest cannabis company on the road to profitability, investors should stay clear of this stock for now.
For one thing, CGC may have to write down the nearly 2 billion CAD in goodwill generated from the 26 acquisitions the company made in less than five years. Those acquisitions were made under the leadership of company founder Bruce Linton, who was ousted as CEO earlier this year. Linton also did seven financing deals during that same time.
Klein, the former Constellation Brands (NYSE:STZ) CFO, will also have to reign-in CGC’s spending. During the company’s most recent quarter, operating expenses rose 48% on a year-over-year basis to $269 million CAD. Research and Development alone surged 526% while General and Administration jumped 137%.
Did Klein’s Honeymoon End Before It Started?
Investors cheered Klein’s Dec. 10 appointment announcement, sending CGC shares up 13%. Unfortunately, GCG stock gave back most of its gains when investors realized that STZ isn’t likely going to increase its 37% stake in CGC. Constellation has got plenty of other problems. Meanwhile, the company still has to deal with the slower-than-expected growth in Canada and uncertainties about U.S. legalization.
I agree with CGC stock bulls who argue that the company is well-positioned to take advantage of the skyrocketing demand for cannabidiol (CBD), a compound derived from cannabis that lacks THC, which makes users high. The company recently introduced its First and Free line of CBD products to the U.S. market and is planning to build a $150 million hemp processing plant in New York State. However, the CBD market is getting riskier.
FDA Warns Consumers On the Dangers of CBD
Cannabis advocates have long argued that CBD has the potential for treating a range of ailments, including Parkinson’s disease, although there isn’t any scientific basis to back up these claims. Of course, one of the main reasons why there aren’t many CBD studies is because marijuana remains illegal under federal law.
Getting legal pot to study scientifically was difficult until fairly recently. Nonetheless, the FDA’s recent warning letter should concern anyone who owns CGC stock or any other pot stocks. U.S. government officials are being understandably cautious with CBD given how popular it has become.
FDA Principal Deputy Commissioner Amy Abernethy warned consumers that there is plenty about CBD that scientists don’t know.
“Aside from one prescription drug approved to treat two pediatric epilepsy disorders, these products have not been approved by the FDA and we want to be clear that a number of questions remain regarding CBD’s safety – including reports of products containing contaminants, such as pesticides and heavy metals – and there are real risks that need to be considered,” she writes.
If the FDA cracks down on CBD as it did with vaping, it would complicate any efforts to legalize cannabis in the U.S. That casts yet another dark cloud over CGC and other pot companies, giving yet another reason to avoid these risky stocks.
Jonathan Berr doesn’t own shares of any of the aforementioned stocks.