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Trouble in Paradise for Canopy Growth?

Bruce Linton departs

Yesterday, Canopy Growth (WEED)(CGC) announced that co-CEO and board member Bruce Linton would be stepping down and current CEO Mark Zekulin will become the only CEO running the company. This isn’t the first time a high-profile cannabis company’s CEO has stepped down. Earlier this year, Vic Neufeld also left his position at Aphria (APHA) due to allegations of wrongdoing in its acquisition of Latin American subsidiaries.

These allegations were confirmed in the company’s Q3 earnings results, where it wrote off an impairment charge of 50 million Canadian dollars related to Latin American assets. The implications brought serious trouble for Aphria, and its CEO stepping down as a result seemed appropriate. With Neufeld gone, Aphria has new aims. To learn more, read How Does Aphria Plan to Reach the One Billion Club?

Reportedly fired

Linton’s exit comes as a shock to the cannabis sector, particularly after it was reported that he was actually fired. He called CNBC to express his take on this development, stating that “I think stepping down might not be the right phrase,” adding that he was “terminated” from the company.

Trouble in paradise for Canopy Growth?

Given Aphria’s recent history, we can hypothesize Canopy Growth may also have removed its CEO due to troubles. Let’s explore.

The most recent sign of trouble at Canopy was its disappointing earnings release. It appears to have irked Constellation Brands (STZ), which had invested ~5 billion Canadian dollars in the company. BNN Bloomberg reports that Constellation president and CEO Bill Newlands was “not pleased” with Canopy’s earnings release.

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Despite its disappointing earnings results, Canopy still has a lot of reasons to be optimistic. The top cannabis sector player has a wide net cast over a variety of product formats and markets. It is also setting up US hemp operations, and in Europe, it supplies to Germany—its biggest market outside of Canada. Canopy is also among the select few cannabis companies with a large cash balance on its books, with ~4.5 billion Canadian dollars ready to be deployed in future opportunities and acquisitions.

How the market reacted

Canopy Growth stock fell immediately after the news broke yesterday, but recovered during the day to end ~2% higher, implying that markets approved of Linton’s removal from the company. Cowen analyst Vivien Azer wrote that the news was no surprise, while RBC Dominion Securities analyst Douglas Miehm said he expects the company to experience volatility over the next few quarters due to the transition.

Canopy CEO Mark Zekulin said he remains “committed to a successful transition over the coming year as we begin a process to identify new leadership that will drive our collective vision forward.”

Most of the 20 analysts covering Canopy Growth recommend “buy.” Their average price target of 72 Canadian dollars is ~34% higher than the stock’s July 3 closing of 53.5 Canadian dollars. The cannabis market’s reaction to the news was mixed, with Cronos Group (CRON) falling 1.7% and Tilray (TLRY) rising 0.7%.

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