Want to know one big reason why Canopy Growth has faltered? Look at its corporate governance, says one investor.
The news isn’t getting any better for Canada’s marijuana sector as a number of high-profile companies posted their earnings this week, including industry leader Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED) whose losses grew over its latest quarter.
And while the time may come when investing in cannabis makes sense, that surely isn’t now, says portfolio manager Brian Madden, who claims that like the rest of the space, Canopy is still overvalued.
Canopy Growth delivered its second quarter fiscal 2020 results on Thursday, with revenue climbing to $76.6 million, up from $23.3 million a year earlier but down 15 per cent from the previous quarter. Canopy’s net loss of $374.6 million was also larger than the $330.6-million net loss a year ago.
Canopy management said that the company is facing a number of headwinds that are dogging the industry as a whole, including a oversupply issue where only a few quarters ago a lack of product on store shelves was the main complaint.
“The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market,” said CEO Mark Zekulin in a press release.
Canopy reported a restructuring charge of $32.7 million over its Q2 related to returns, return provisions and pricing allowances related to its softgel and oil product portfolio.
Madden says that investors would be wise to steer clear of Canopy and the rest of the sector until more clarity surfaces around the fledgling industry.
“Most importantly, the governance has been terrible around almost all of these issuers including Canopy where the CEO stepped down or was ousted, depending on who you talk to…”
“We haven’t invested in the sector,” said Madden senior vice president and portfolio manager at Goodreid Investment Counsel, who spoke to BNN Bloomberg on Wednesday. “We think that there’s too much uncertainty around it and how the market share is going to evolve — who’s going to capture how much of the value add, whether it’s the retailer taking most of the prize, whether it’s the manufacturer or intermediaries that own or develop the value-added formulations like Canopy Growth, for instance.”
“Regulations are still in flux, edibles are supposed to be coming to market, then you add exports, whether or not the US will legalize, etc,” he says. “There are a lot of unknowns.”
“Most importantly, the governance has been terrible around almost all of these issuers including Canopy where the CEO stepped down or was ousted, depending on who you talk to,” Madden says.
The departure of then-co-CEO Bruce Linton in July of this year was a sign that all was not well for Canopy and potentially for the market as a whole, as investors continued a broader selloff from the space which began in late spring and has yet to stop.
Canopy’s share price has fallen 65 per cent since late April and at $24 per share is now down 33 per cent for the year.
But Madden says that Canopy is still too expensive.
“This one, we’ve probably done more work on in terms of valuation and strategy work more than any other, but we’re not even nearly interested in it at this price. I would suggest at sub-$15 you can maybe defend this on fundamental and valuation grounds but obviously we’re a far cry from there,” Madden says.
“The accounting for marijuana earnings, speaking as someone who is an advisor to the Accounting Standards Board of Canada are like a fairytale. It’s a really tough sector to invest in. We haven’t been there and we’d advise you to not be there either,” he says.