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Canopy Growth: Bruce Linton Is Buying, Should You?

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Bruce Linton, Canopy Growth’s (CGC) (WEED) former co-CEO, has acquired more stock in the company. On July 3, Canopy Growth announced that Linton would step down as the co-CEO and a board member of the company, which he co-founded. However, Linton stated that Canopy Growth fired him. Constellation Brands (STZ), the company’s largest shareholder, wanted a change in the leadership.

In an interview with CNBC on August 20, Linton said, “It was a right time for them to make the change, and it was the right time to buy the stock.” He also said, “Because when I look at it, I go, I was one person. If I was that important to the company, then the company’s not that key.”

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Accessing Canopy Growth’s performance

On July 3, Canopy Growth announced that Mark Zekulin, who was serving as the co-CEO with Bruce Linton, would be the company’s sole CEO. Since Linton’s termination, Canopy Growth stock has fallen 37.4%.

On August 15, Canopy Growth posted dismal first-quarter earnings for fiscal 2020. The company missed the top-line and bottom-line expectations by a considerable margin. Following the lower-than-expected first-quarter performance, many analysts lowered their target prices. All of these factors contributed to the fall in Canopy Growth’s stock price.

So, why is Linton buying? During the interview, he said, “There’s this big headline number, but when I look at stocks and look at quarterly announcements, I really don’t care about the noncash affecting things. … I just look at the actual losses and where they spent their money. It wasn’t that big, and what they spent it on was intellectual property and growth.”

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Analyzing Canopy Growth’s growth initiatives

Analysts expect Canopy Growth’s revenues to rise 185.5% to 646.3 million Canadian dollars in fiscal 2020 and  87.1% to 1.21 billion Canadian dollars in fiscal 2021.

The company wants to expand its production facility and develop new products to drive domestic sales. In international markets, Canopy Growth wants to expand its medical cannabis business. The company wants to develop a portfolio of high-quality CBD products and brands for the US market.

For the last two years, Canopy Growth’s management has been working to develop a strategy for vape products. The company stated that it will launch 15 SKUs in December. Regulations on cannabis edibles and beverages will likely be cleared later this year. As a result, Canopy Growth plans to have several edible products later this year. The company acquired a former Hershey chocolate factory, which will be used to develop a line of chocolate products.

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Canopy Growth is developing a portfolio of high-quality CBD products in the US. The company is also acquiring production facilities, which are necessary to bring its products to the market. Canopy Growth expects to introduce the CBD products by the end of this fiscal year. All of the initiatives should drive the company’s revenues.

Analysts expect the company’s net losses to rise 101.4% to 1.38 billion Canadian dollars in fiscal 2020. However, the net losses in fiscal 2021 will likely fall 77.5% to 310.7 million Canadian dollars.

Analysts’ recommendations

Since Canopy Growth posted its first-quarter earnings:

  • Coremark Securities downgraded the stock from “buy” to “market perform” and cut its target price from 55 Canadian dollars to 48 Canadian dollars.
  • Benchmark lowered its target price from 100 Canadian dollars to 60 Canadian dollars.
  • Canaccord Genuity cut its target price from 70 Canadian dollars to 60 Canadian dollars.
  • CIBC reduced its target price from 80 Canadian dollars to 50 Canadian dollars.
  • Alliance Global Partners lowered its target price from 67 Canadian dollars to 55 Canadian dollars.
  • Cowen and Company reduced its target price from 82 Canadian dollars to 48 Canadian dollars.
  • PI Financial cut its target price from 80 Canadian dollars to 50 Canadian dollars.

Overall, analysts favor a “buy” rating. Among the 20 analysts, 65% recommend a “buy.” On average, analysts’ 12-month target price is 73.44 Canadian dollars with a return potential of 62.6%.

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Peer comparisons

The recent fall has dragged Canopy Growth’s return for this year into the negative territory. The stock has fallen 8.5% YTD (year-to-date) as of Thursday. The company has underperformed its peers and the broader equity market. The S&P 500 Index has returned 16.6% YTD.

Aurora Cannabis (ACB) and Cronos Group (CRON) have returned 13.7% and 8.0%, respectively. The recent acquisition of Hempco Food and Fiber and strong revenue guidance for the fourth quarter drove Aurora Cannabis’s stock price. The company’s management expects it to report revenues of 100 million–107 million Canadian dollars in the fourth quarter compared to 65.1 million Canadian dollars in the previous quarter.

On August 8, Cronos Group reported its second-quarter earnings. The company outperformed its revenue guidance. However, Cronos Group’s operating losses were wider than analysts’ expectations, which offset some of the stock gains. Recent regulatory scandals had a negative impact on the cannabis sector. However, Jim Cramer, the host of CNBC’s Mad Money, is buoyant about the industry. To learn more, read Jim Cramer Thinks Cannabis Is Back in Action.

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