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Canopy Growth Plays to Its Strengths for Future Growth

Being first to market rarely pays off in the long run

Canopy Growth (NYSE:CGC) announced to company employees in an April 29 email that it was eliminating 200 more employees, including 44 from head office. While CEO David Klein said the job eliminations were difficult to make, they were necessary to keep the company headed in the right direction. If you’re a long-time owner of CGC stock, this indicates the company is looking to play to its strengths for future growth. 

cgc stock
Source: Shutterstock

Here’s why that’s a good thing. 

There Are Still Plenty of People at HQ

While 44 were let go at head office, there are still 1,551 that remain. It’s important to remember that that is 1,551 more than existed at the Smiths Falls, Ontario, plant before the company set up shop in the former Hershey’s (NYSE:HSY) facility.

As far as I know, 750 was the maximum number of people that were employed at the height of Hershey’s ownership. So the citizens of Smiths Falls are still farther ahead with Canopy. 

“This decision was made as part of the business review that Canopy Growth announced back in mid-February and follows decisions announced March 5 and April 16 to refocus the priorities of the business,” Klein stated in the email to employees. 

“Although difficult, the decisions that have been made over the last few months are to allow Canopy Growth to remain focused on the areas where we are winning and ensure that we are delivering the highest quality products to our consumers in every market where we operate.”

No longer does Canopy want to be the first to market, it wants to be the best where it feels it can generate the greatest rewards for shareholders and employees. 

It is this focus that I emphasized would help the company in my February article about Canopy. A few days previously, my InvestorPlace colleague Laura Hoy argued that the company’s inability to launch its cannabis-infused drinks on time was indicative of a bigger execution problem at the company. 

I, on the other hand, felt as though the delayed launch had more to do with the ongoing problems cannabis retailers were having ramping up for Cannabis 2.0 than the company not being ready to manufacture and distribute the product. 

As is generally the case in life, the accurate story about Canopy’s delayed drinks launch is likely somewhere in the middle. We may never know the full story. 

What I do know is that Klein’s internal statements make it clear that rushing products to market just to be first is no longer acceptable to him, the board, and the rest of the executive management team. 

The best means doing what’s necessary to make customers happy about the overall Canopy experience—not being first to market. 

CGC Stock Depends on a Steady Hand

Last October, I argued that Constellation Brands (NYSE:STZ) was doubling down on its investment in Canopy, despite the fact it had sent co-founder Bruce Linton packing due to a lack of operational discipline.

I felt Cannabis 2.0 would be a defining moment for the company. Since then, it’s made an important acquisition, buying 72% of BioSteel Sports Nutrition, which got the company into the natural sports nutrition market, with an opportunity to deliver healthy CBD versions of BioSteel products.  

While I felt there were a few external candidates worth considering to replace Linton, the board ultimately went with Klein, Constellation’s former CFO, who joined Canopy’s board in October before being promoted to CEO in December. 

The fact remains that it was always Constellation’s intention to make Canopy the fourth leg of its revenue stool to complement its beer, wine, and spirits businesses. I never thought Constellation would run away from its commitment to Canopy. 

On May 1, Constellation Brands exercised 18.9 million warrants, upping its ownership in Canopy to 38.6%. With the future exercise of the remaining 139.7 million warrants, Constellation would own 55.8% of the company.  

“This additional investment validates the work our team has done since attracting the initial investment in 2017. It also strengthens our ability to pursue the immense market and product opportunities available to Canopy in Canada, the U.S. and other key global markets,” Klein said in its press release.

Bruce Linton was the perfect CEO to get the company up and running. Now, it needs a steadier hand to carry it from startup to industry leader. David Klein is better equipped to make this happen. 

Playing to its strength is not only sensible from a financial perspective, but it also makes sense strategically. Being first to market is generally overrated. 

Canopy shareholders ought to be happy about this.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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