What Caused Today’s Rally in Cannabis Stocks?

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December 9, 2019 5:41pm NYSE:MJ

NYSE:MJ | News, Ratings, and Charts

Pot stocks rallied today after Canopy Growth Corp. (CGC) announced its new CEO will be David Klein, current CFO Constellation Brands Inc.

“David is an experienced strategist with a deep understanding of how to build enduring consumer brands while leveraging operational scale across a dispersed production footprint,” Canopy Growth said in a statement. 

Klein will take over from current CEO Mark Zekulin starting January 14. Zekulin presided over roughly 2 quarters of tepid company earnings, against a backdrop of industry-wide problems for the Canadian cannabis sector. Zekulin became interim CEO in the vacuum of former-CEO Bruce Linton’s firing.  

Prior to Linton’s termination, Zekulin was co-CEO and mainly handled the company’s day-to-day operations, while Linton functioned as more of a spokesperson and liaison to the capital markets.

In a recent interview, Linton said he thinks Constellation could be preparing to acquire the remainder of Canopy, noting the company’s research into marijuana’s medical applications and its “disruptive” portfolio of cannabis beverages. 

“All these things are mega medium- to long-term outcomes, and Constellation has the best seat in the house to see that,” said Linton. “What they may say is, ‘We can actually buy the whole thing and about two years after we buy it, sell the medical division for more than we paid for the whole thing.'”

Analysts weigh in

Cantor Fitzgerald analyst Pablo Zuanic concurred with Linton’s sentiment, saying the acquisition has about 2/3 chance of happening in the near term.

“On the argument of an improving outlook for the cannabis industry, we think STZ could justify a deal,” he wrote.  

Alliance Global Partners analyst Aaron Grey also believes that this move could signal that Constellation is vying for greater control of Canopy (and its $4 billion investment).

“While we believe the move makes sense operationally given other management hires from STZ including Canopy’s CFO and CAO, we had thought the company may have looked for an outside hire,” he said.

“The bigger question in our opinion continues to be if and when we will see the rollout of more stores in the provinces of Quebec and Ontario. We continue to see the continued delay of store rollouts of having an outsized impact on Canopy given the company’s high inventory levels and rough 6 million sq. ft. of cultivation space.

“That said, given David’s background as CFO of STZ, we expect the company to have an increased focus on profitability, while still focused on overall growth as the company aims to become a leading global cannabis CPG company.”

Alliance Global Partners rates Canopy stock as neutral.

Jefferies analyst Owen Bennett had a mixed response to the news. “Positive views (are) likely to be taken around implications for greater financial focus and commitment from Constellation Brands, though also negatives around potential lack of external appetite for the role, and the likelihood of a heavy focus on an unproven beverage category,” he wrote.

“Expect financials to continue to underwhelm as domestic Canada struggles continue.”

Canopy Growth Corp plans to launch a line of Tweed-branded drinks with 2 mg of THC per can, as well as Houseplant Grapefruit and Houseplant Lemon drinks (as part of a partnership with actor Seth Rogen). Those drinks will contain 2.5 mg of THC per 355 mL can.

Additionally, the company is developing seltzer water products under the brand name Quatreau, which will contain 20 mg of CBD, or 2 mg CBD and 2 mg THC per can.

CGC is also coming out with a brand of mixers for consumers looking for a more potency. The product will be packaged in 150 ml bottles using its propriety clear liquid cannabis.

 


Canopy Growth Corp. (CGC) rose $0.07 (+0.33%) in after-hours trading Monday. Year-to-date, CGC has declined N/A%, versus a 18.09% rise in the benchmark S&P 500 index during the same period.


About the Author: Eric Bowler

eric-bowlerEric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.


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