Want a potential winner in the cannabis sector? Keep your eyes on Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED).
Greg Taylor, chief investment officer at Purpose Investments, thinks that while many of Canada’s pot companies will fold as the industry goes through a major downsizing in 2020, Canopy Growth’s global exposure could be a difference maker.
Last January, cannabis couldn’t have started out better, as the sector saw leaders like Canopy, Aphria and Cronos Group post huge gains in the early months of 2019. That promise quickly faded, however, as the reality of a slow-growing Canadian legal weed economy dawned on companies still trying to find their feet and showing little sign of profitability, even now more than one year into legalization.
The bubble has truly burst, says Taylor.
“I think that it could get a little better [in 2020] but it’s not going to get across-the-board better,” said Taylor, speaking to BNN Bloomberg on Thursday. “Everyone got so excited about the hype and Canada was really the only place that you could invest in the sector globally, so we had a lot of money crowded into too many names and now we’re going through the cleansing, the refresh that it’ll have to go through.”
“There will be some winners to come out of this but I think there’s going to be a lot of pain in the sector for the next 12 months,” he said.
Taylor points to companies operating in the US cannabis market as one potential source for optimism in the year ahead, as businesses in well-established and expanding markets in a number of states are becoming profitable.
But for the more than 200 licensed producers in Canada, the carnage is coming, with Taylor seeing more bankruptcies than takeouts in the cards.
“The big problem right now is that there’s too much capacity,” Taylor said. “When you’re buying someone else, you’re either buying for capacity or brand, and that’s the big knock on the sector is that no one needs to buy anymore capacity and there’s been a lack of ability to create brands —it’s not like you’re going to buy a company for a brand that no one is buying anyway.”
“I think that there’s a lot of hope that there will be consolidation and some mergers and there might be some forced consolidation but I think that for the bulk of the year there are going to be a lot of junior companies which are just going to fade away and a lot of bankruptcies,” he said.
The drama played out by Canopy Growth in 2019 was emblematic of the sector as a whole, where not only did investors start pulling out as the company’s losses ballooned but management felt the pressure. Co-CEO Bruce Linton was fired in June and replaced last month with David Klein, a CFO from Canopy’s major investor, US alcohol company Constellation Brands.
Taylor says that Canopy’s story will be one to follow in 2020.
“Canopy is an interesting one because it’s still the biggest company globally in the sector and it has a lot of good positioning in different countries, not just Canada, and it’s still one of the odds-on favourites to be a winner going forward,” Taylor said.
“What is interesting is […] how this transition will take place from the Bruce Linton style of management which was more the visionary for the sector and talking about how to grow it to transition to the Constellation more operating side of creating brands and creating profits,” he said.
“We’ll have to see if they can deliver on profits this year,” Taylor said.