Firing of Canopy Growth Corp. CEO Bruce Linton Triggers Potential Play
Some of the most frequent trading questions we get revolve around cannabis stocks.
Are they a buy? Or a sell?
Should you trade in and out of them, or buy and hold them for the next 10 years?
Given their popularity – and their growth potential – these are all valid questions.
In today’s Trade of the Day, let’s answer these questions by examining the current value of Canopy Growth Corp. (NYSE: CGC), which is arguably the top cannabis name in the sector.
As you’ll see, there’s a fascinating tug-of-war occurring behind the scenes. And it has introduced some doubt and uncertainty among Canopy investors.
However, it could lead to opportunity.
Let’s start with the backstory…
Global alcohol leader Constellation Brands made major headlines when it invested $4 billion in Canopy last year.
Canopy’s board became mostly controlled by Constellation Brands with this move. And this caused a difference in opinion as to how the company should operate.
Constellation Brands wanted to start making money immediately. But Canopy CEO Bruce Linton wanted to continue operating in the growth and creation phase.
Linton explained on Yahoo Finance, “Many companies that trade on exchanges are measured on earnings per share every 90 days. That’s a good model, but there are other companies that are in a growth and creation phase – Amazon might have done a bit of that, Netflix… where what they’re doing is looking at… how do they build this thing out and emerge as a massive dominant player.”
This was the model that Linton was using for his vision for Canopy. For instance, he acquired U.S. multistate marijuana operator Acreage Holdings.
But growth acquisitions like that come at a price. And Canopy was reporting unprofitable quarter after unprofitable quarter.
Such moves didn’t match the vision that Constellation Brands CEO Bill Newlands had for Canopy. As a result, the decision was made to let Bruce Linton go.
Without question, it was a surprise firing. The co-founder of the world’s largest marijuana company has just lost his job.
From a trading perspective, a surprise move like this creates investor uncertainty and fear. As a result, you’ll notice that Canopy is now trading down to the lows it saw back in early April – and also in early June.
I view this as a short-term overreaction…
Action Plan: All companies in rapid growth phases must spend money. However, there needs to be a balance between rapid growth and monetizing your investment. From the perspective of Constellation Brands, there needed to be a middle ground – and that was the impetus for letting Linton go.
In other words, I view this as a short-term surprise that will be absorbed in the weeks and months ahead. After all, do you think Constellation Brands wants to see its new $4 billion acquisition trend lower? Of course not. The company is sacrificing short-term pain for long-term prosperity. That’s why I believe Canopy looks attractive at these lows.