The marijuana industry is still in its early stages, but the stock market has been a great indicator of how it’s going. Marijuana stocks rose after replacements for their CEOs and saw record highs this month.
The “cbd stocks to watch” are companies that have replaced their CEOs with a CEO who is involved in cannabis. This can be seen as a positive or negative change for the company.
Is it true that Canopy Growth and Aurora Cannabis are better investments now that their CEOs have left?
Hexo (NASDAQ:HEXO), a cannabis manufacturer, made headlines last month when it announced a leadership shift. It’s not unusual in a fast-changing market like marijuana, where businesses are constantly modifying their strategy. But, in general, do such actions pay off?
Canopy Growth (NASDAQ:CGC) and Aurora Cannabis (NASDAQ:ACB), two of Canada’s largest cannabis firms, have both changed CEOs in recent years. The major issue is whether they’re in better condition now than they were before the modifications.
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The firestorm that erupted in the industry
When former Canopy Growth CEO Bruce Linton was fired from the leading cannabis producer in July 2019, he made it clear that it was a termination (Canopy Growth only said he was going to “step down”).
It was noteworthy, since the industry’s leader was dethroned only months after announcing a partnership with multi-state marijuana operator Acreage Holdings to merge the two firms once marijuana is legal in the United States. The deal hasn’t been completed yet.
Constellation Brands, which has invested over $4 billion in Canopy Growth, has named its Chief Financial Officer David Klein to succeed Linton as CEO of the cannabis company starting in January 2020.
Constellation was undoubtedly irritated by Canopy Growth’s rising losses, which reached 670 million Canadian dollars for the fiscal year ending March 31, 2019, more than 12 times the CA$54 million loss it had a year earlier. Despite a doubling of sales to CA$253 million, the company’s gross margin only increased by CA$22 million. On June 20, two weeks before Linton was fired, the findings were made public.
The company’s profitability is still a problem, with losses of CA$1.7 billion in fiscal 2021 and CA$1.3 billion in fiscal 2020. Meanwhile, the company’s trailing 12-month gross margin of $88 million is roughly comparable to Canopy Growth’s CA$89 million profit in fiscal 2019 (despite its sales being substantially greater at CA$572 million over the prior four quarters).
Despite layoffs and cost-cutting initiatives, it’s difficult to argue that Canopy Growth is in a better situation now than when Linton departed. While it has added to its list of possible U.S. acquisitions and increased revenue, its bottom line continues to be a challenge.
If you bought Canopy Growth stock in July of this year, your investment would be down more than 67 percent right now. In contrast, the S&P 500 has increased by 56 percent.
Aurora’s CEO “resigned” a few months later.
Terry Booth alluded to himself as “the latest carnage” in a BNN Bloomberg interview in February 2020, after investors discovered that he would also be stepping down as CEO of Aurora Cannabis. Investors also heard that the firm will be laying off around 500 people as part of a reorganization attempt. On an interim basis, Michael Singer, the company’s executive chairman, took over as CEO.
The firm would then announce a permanent successor in Miguel Martin, who is still in charge today, in September 2020.
Booth’s resignation was announced when the firm released its fiscal 2020 second-quarter results (period ending Dec. 31, 2019). Aurora’s top line increased by just 3.4 percent year over year in the second quarter, with net sales of CA$56 million.
However, unlike Canopy Growth, its margins deteriorated. Aurora’s gross profit was down from a year earlier (CA$29.9 million vs. CA$32.1 million). The remainder of Aurora’s financials were considerably worse, with the business losing CA$1.3 billion in a single quarter, owing mostly to impairment writedowns.
Despite the fact that the company’s losses have decreased in previous quarters, revenue seems to be unchanged. Net revenue for the quarter ended June 30 was little under CA$55 million. It was slightly more than CA$55 million in the previous quarter.
To Aurora’s credit, the company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss was just CA$19.3 million in the second quarter (down from CA$80.2 million in the second quarter of 2020). But it’s difficult to be enthused about something if there isn’t any progress.
Aurora’s stock has dropped 69 percent since February 2020 (compared to a 43 percent growth in the S&P 500), and the company has suffered since removing its CEO.
Investors in cannabis should be cautious about reading too much into CEO moves.
As the experiences of Aurora Cannabis and Canopy Growth show, changing leadership does not always enhance a company’s prospects. The issues that existed before the CEOs were changed seem to continue be a source of worry now. While the firms are somewhat different, they aren’t always better investments than they were in the past.
Hexo may not end up the same way, but it’s a good warning to investors not to put too much stock in a CEO change since the issues may be too deep to be solved with simply a change at the top.
Even if a faltering firm can be turned around, it may take a long time for a CEO to make the required adjustments. To reduce risk, cannabis investors should stick with marijuana firms that have been generating decent figures in the first place, rather than betting that failing businesses may turn into wonderful investments by accident.
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