Canopy Growth Turnaround Misses Important Milestone

Back in December, things appeared to be looking up for marijuana firm Canopy Growth (NYSE:CGC). Not only had Canopy named a new CEO, but CGC stock looked likely to get a boost as Canada’s Cannabis 2.0 finally came into effect.

Canopy Growth Turnaround Misses Important Milestone
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Canopy’s new CEO David Klein is due to take the reins in January. But even with his expertise, it will be tough to bounce back from the firm’s latest misstep.

Cannabis 2.0 Flop

Once again, Canopy growth was late to the party when Cannabis 2.0 products finally hit the shelves. Earlier in January, the firm admitted that its cannabis-infused beverages weren’t going to make it to market as early as anticipated. While the impact of this misstep wasn’t outlined, the firm said it isn’t expecting the delay to make a major dent in its sales figure.

There are two major red flags that investors should be concerned about in Canopy’s press release. The first is execution. A big part of Canopy’s advantage over its peers is its link with Constellation Brands (NYSE:STZ). As Constellation is a beverage company, it’s surprising to hear that Canopy wasn’t able to scale its cannabis-infused beverage business successfully.

Not only does Canopy have the financial backing of Constellation’s 35% investment, but the firm should also be able to draw from Constellation’s experience as a leader in the beverage industry. That suggests that making cannabis beverages is difficult to do profitably at scale. Or, that Canopy is so disorganized that even Constellation couldn’t clean up the mess.

Either case isn’t great from an investment standpoint.

The second, and arguably more important reason investors should be concerned about CGC stock is the fact that the firm doesn’t expect its failure to launch on time to impact sales. Canopy isn’t Apple (NASDAQ:AAPL) — it’s not selling a product that people are so dedicated to that they’re willing to wait and shun alternatives.

In the best-case scenario, cannabis beverages aren’t expected to sell well at first, picking up steam later in the year. But there are other explanations for the firm’s nonchalance, like intense competition in the beverage space.

Don’t Expect to Be Dazzled by CGC Stock in Q4

By the time Canopy reports fourth-quarter results in February, Klein will be in place. However, none of his influence will be visible in the earnings call. Plus, investors will want an update about Canopy’s progress getting beverages on shelves, which is unlikely to have any upside surprise.

With Canopy’s major miss this winter, I wouldn’t expect the stock to hit a turning point until later this year once Klein hits his stride as CEO. His experience at Constellation should give Canopy more guidance, hopefully helping the firm avoid missteps like this one. But it will take time for his influence to make a dent.

Plus, Klein, like many new chief executives, is likely to clear out the cobwebs in the firm’s financials during his first quarter as CEO. A CEO’s performance is measured by where they take the company from where it was left to them. Therefore, their first quarter on the job is when they hunt for all of the skeletons in the closet and purge them.

For that reason, I’d expect Q4 and Q1 to deliver more disappointment for investors. However, as the marijuana industry continues to develop and the market for cannabis-infused products grow, I still believe Canopy is well-positioned to take advantage of it. Under the guidance of Constellation, Canopy should become a much more efficient organization capable of keeping up with the growing industry.

The Bottom Line

2020 could be a big year for pot stocks after they were absolutely pummeled in 2019. With the U.S. presidential elections coming up in November, marijuana is likely to become a hot topic among legislators once again. The marijuana industry won’t be able to realize its potential until the drug has been removed from the federal government’s list of Schedule I drugs. But when that happens, the industry will see a sizable boost.

For now, marijuana has taken a back seat to other issues like healthcare and Donald Trump’s impeachment. But as the vote draws nearer, I’d expect to see marijuana start to get some airplay, potentially lifting the entire sector along with Canopy.

As of this writing, Laura Hoy was long AAPL.

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