Covid 19 and a great western democracy dwindled down to a banana republic may have had a tiny affect on the economy. If you’ve been following financial news lately you may have noticed that the stock market has been reacting to the news like we all have- in complete shock. Also like the stock market we have our own lives and businesses to run so we can’t focus on all that noise for too long. Even though there is a high unemployment rate and a crippling recession the markets have seen a bit of a boom lately. I am writing this in November of 2020 so please take that into account if you are reading this blog on your tablet using potato batteries in the unforgiving wasteland of the post apocalypse.
This is part of a mini blog series we like to call, “Know Your Pot Stocks”. We are in no way qualified to recommend investing in a company. Think of this as a one stop shop to start your research if you are interested in investing in cannabis stocks. I just so happen to be in the same boat as I have yet to pull the trigger on a stock. Therefore I figured that I would share my research with you and then when we can all make our own decision.
Today we will focus on the cannabis company Canopy Growth Corportation.
Who Is Canopy (CGC: TSX)?
Canopy Growth Corporation is a nice humble mom and pop shop that just so happens to be the largest cannabis company in the world. Formerly known as Tweed Marjuana Inc. Canopy is headquartered in the small town of Smith Falls, Ontario about an hour from Ottawa.
Canopy Growth Corporation (CGC) was listed on the TSX July 26, 2016 and on the NYSE May 24th, 2018.
Canopy will forever have its place in history as the first publicly traded cannabis company ever. Bruce Linton completed the first legal transaction for recreational cannabis at midnight October 17 in the year of our lord two thousand and seventeen. That was the first day- the first hour marijuana was legal in Canada.
In August of 2018 Canopy partnered with Constellation Brands which is an American wine and beer producer. Constellation paid 3.8 billion US dollars in order to own 38% of Canopy Growth Corp. The purpose of this partnership was to raise the amount of funds required to do business internationally. This allowed Canopy’s market value to increase to 12 billion USD.
In 2019 a there was an aggressive restructuring plan enacted by the board. This was due to revenues were less than expected resulting in shareholders losing a total of over 300 million dollars. The reason for this was the expenses were ballooning and there was an over-estimation of recreational sales once legalization happened. Canopy was dumping money into the size of their greenhouse operations in order to satisfy the demands that they didn’t understand yet. It was a gamble and they lost. This has been a common theme when analyzing other major publicly traded cannabis companies. Check out our previous entry about Aurora to find out more.
The 2019 restructuring cost Bruce Linton his position as CEO. Eventually David Klein who was executive VP and CFO was named CEO. Fun fact: David Klein was also the former CEO Constellation Brands the company that holds a 38% stake in Canopy. There’s little doubt that Constellations interests are now Canopy’s interests. Isn’t capitalism exciting?
In December 2020 Canopy started closing grow sites and 220 employees lost their jobs. Since Klein took over, 3 million square feet of grow space has been closed in order to stop the bleeding of expenses.
Acquisition Is Their Game
Canopy has partnered with or acquired the following companies in order to tackle the market internationally:
- Alcaliber S.A (Spain/Germany)
- Spectrum Cannabis Denmark ApS (Denmark)
- Annabis Medical (Czech Republic)
- Daddy Cann Lesotho (Africa)
- Beckley Foundation (UK)
- Acreage Holdings (BC, Canada)
- Hiku Brands (Toronto, Canada)
Like mentioned above Canopy will have the historical distinction of being the first publicly traded company on the TSX and NYSE. But does this company have anything else to offer besides being the first pot dealer on an exchange?
Canopy’s main advantage is its size. Being a giant who has aligned itself with brand names such as Martha Stewart and Snoop Dogg (or is it Lion? Or better yet, who cares?). Partnering with big celebrities is essential in creating a brand in order to stand out from its competition.
Currently Canopy has 15% of the Canadian market and 54% of the infused beverage market. If infused beverages are to become mainstream Canopy has a big opportunity to capitalize on its already sizable market share. Also, after the latest US election, five more states have voted for legalization. It’s expected Biden may push for a federal mandate to legalize marijuana but that’s not guaranteed.
Canopy has also aligned itself with medical marijuana distributors around the globe. Increasing those sales will be essential if they want to create value for their stocks.
Thanks to CBD oil and positive PR when it comes to CBD, Canopy is reporting revenue growth. As of December 2020 their stock has seen a 38% increase.
Boasting the largest capital of all publicly traded cannabis companies is nothing to sneeze at either. That provides good security for the company but will it mean profits for shareholders?
Canopy has a bleeding problem. It bleeds money and that counteracts any optimism when they report high revenues. David Klein has done what he can to stop the bleeding and it was probably necessary. The recent closures of facilities across Canada are supposed to save the company approximately 200 million dollars.
While Canopy posts revenues it also reports severe net losses. For example they reported that quarterly revenues increased 77% but reported a loss of 85.7 million dollars in the last quarter alone. In the first half of the 2021 fiscal year report they reported a net loss of 227.4 million. In their last quarter of the 2020 fiscal year they reported a 1.3 billion dollars loss. Yikes.
There is optimism over the US election results as well. Yes the democrats are more in favour of decriminalization or legalization than the Republicans. Remember that Biden was once anti-marijuana although he’s a politician and they do flip flop all the time. If there is a Republican Senate there is no way a legalization of marijuana will get passed on a federal level. Thanks war on drugs. There are still opportunities in the US market but if the federal law doesn’t change those opportunities will be limited.
Plaintiffs claim Canopy artificially inflated shares. Canopy is being accused of over-estimating the market to lure potential investors in order to raise stock value. In Canopy’s defense they claim Ontario’s tough regulations slowed the growth of retail sales which contributed to lower than expected revenues.
I think we all know someone or you might be that someone that had high expectations revolving around pot stocks. When a large company with billions of capital behind it doesn’t perform of live up to the hype you know the lawsuits are going to start coming.
Canopy denies all allegations and has stated that it will “vigorously defend itself.
Canopy Growth owns 27% of Canopy Rivers and 24% of TerraAscend which gets converted into common shares once (if) marijuana get legalized federally in the United States. So what does these entangled billion dollar corporations have in common? They’re being sued for 500 million dollars over a grow facility in Leamington, Ontario. The home town of one of their competitors Aphira.
Canopy also owns 49% of Pharmhouse, the company responsible for the operations of this 1.3 million square foot operation. Pharmhouse alleges that Canopy Growth, Canopy Rivers and TerraAscend have refused to pay for the cannabis being produced at this facility because the price per gram is no longer “commercially reasonable”. This is compared to a fixed price in the agreement. That fixed price is information not available to a lowly blogging peasant (even a Captain). That is for the parties involved and their attorneys.
Now Pharmhouse is on the hook for the security and maintenance of the facility. Without the incoming cash from the deal with Canopy they won’t be able to afford these services which puts their cannabis license at risk. Isn’t capitalism great?
Canopy again has stated that they will defend themselves vigorously and that’s the only comment they have given regarding this lawsuit. It’s safe to say that Canopy can ill-afford to lose this case as a half billion payout would compound their already deep losses. Even if they settle out of court they still stand to lose hundreds of millions if they lose.
Another day another giant cannabis company biting off more than they can chew and being sued for millions. Perhaps this is par for the course but you don’t see Molson-Coors or Anheuser-Busch getting sued due to mismanagement. That’s probably because they are part of an industry that’s been around for a long time.
Canopy was supposed to be the trailblazer when it came to recreational cannabis. I can still remember the spiel I was receiving from one of my friends over beers before legalization. He explained to me that Canopy was going to be the biggest producer in the world. Once marijuana was legalized the stocks would launch to the moon. It all made sense to me but at the time I didn’t have enough extra cash lying around to invest.
Now here we are in 2020 and recreational marijuana sales are not making us all rich for some reason. Canopy has got to figure out a way to trim the fat and start making a profit instead of relying on stock holders.
Personally I believe this industry is too new to make predictions. I admit I fell for the hype but on closer inspection the short term looks like a big bear market. I think at some point in the future this will be a strong regulated industry. In fact I think one day it’ll be just as solid as liquor, beer and dare I say tobacco. People want this product so why are all these companies with billions screwing it up? Or maybe they’re laying a strong foundation and taking it on the chin so in the future they will be top cheese.
The hype behind cannabis stocks did hold merit as a new prosperous industry was on the horizon. Unfortunately factors such as mismanagement, large spending and competition from the black market have stalled pot stocks. There are a few signs to show that Canopy can start looking bullish but the hype has died down considerably. The losses reported every quarter are looking bearish which is turning a positive bull market… into bull shit.
What do you think? Will Canopy rebound? Are pot stocks in general still worth it?