We are less than one week away from what’s going to be the latest earthquake rattling marijuana stocks — the so-called “Cannabis 2.0” in Canada. One year after the country’s legalization of recreational marijuana, it’s going to sanction the sale and consumption of derivatives such as edibles and cannabis-spiked drinks.
Next week is going to be memorable and important, in other words. But this week wasn’t lacking for news and action with marijuana stocks. Here’s a look at two of the top developments in the sector during the period.
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HEXO puts a hex on marijuana stocks
Although there was much competition, the prize for Worst Week Suffered by a Marijuana Stock unquestioningly goes to HEXO (NYSE:HEXO).
It was bad enough that the stock was hit on Monday with a monster recommendation downgrade from the influential Bank of America Merrill Lynch on the back of the sudden departure of HEXO’s CFO. Subsequent to that very discouraging smack, HEXO announced preliminary figures that were far below its own and analyst estimates.
HEXO severely cut its estimate for its Q4 of fiscal 2019 and full-year revenue (to $14.5 million to $16.5 million, in the former instance), citing industrywide factors such as regulatory restrictions in Canada. It also withdrew its previously announced 2020 guidance. The big change in prognostications was a shock wave that blew through the cannabis sector.
On the back of those sectorwide concerns, nearly every other major pot stock’s price fell in sympathy with HEXO’s inevitable decline. Few could beat its 37% drop over the course of the week, but that wasn’t for lack of trying: Peer Canopy Growth (NYSE:CGC) dived 15%, while Aurora Cannabis tumbled by almost 17%.
HEXO’s dispiriting news impacted professional views on the sector. At the end of the week, Jefferies, for one, cut its recommendation on Canopy Growth from buy to hold. It reduced its price target, too. The bank also slashed the target prices for numerous peers like Aurora Cannabis and OrganiGram Holdings, among others.
The majority of these stocks don’t deserve such a sell-off or some of the drastic recommendation and price-target cuts inflicted by those analysts. The cannabis industry still has vast potential in front of it, despite the many roadblocks and potholes on the way there.
Yet these reduced expectations raise legitimate concerns about the current state of the marijuana industry and the performance of many of the important players in the game. It’s not time to panic about these companies, but investors should certainly keep a wary eye on them.
Canopy Growth’s new chair is Constellation CFO
Constellation Brands (NYSE:STZ) is already the most powerful shareholder in Canopy Growth. As if that weren’t enough influence, this week, one of its executives also ascended to the top of the board of directors.
The Constellation bigwig is its CFO David Klein, who was named chair of the board. Canopy Growth now erases the “interim” adjective from that job title, as Klein is taking his position on a permanent basis. His predecessor, John Bell, had been a placeholder following the high-profile July departure of co-CEO and chair Bruce Linton.
It’s often said that no one ever hears from major investors when a business is doing well; the flip side of that principle might be applying here. Canopy Growth’s stock-price decline is affecting certain Constellation fundamentals, and the alcoholic-drinks maker is clearly concerned. Klein’s ascension, then, might portend a heavier hand.
Regardless, it’s a positive development that Canopy Growth now has a non-interim leader of its board. Taking care of that position bodes well for the CEO job, which is being held at the moment by Mark Zekulin (Linton’s onetime co-CEO). The company says it wants to fill that position by the end of this year. If so, and if it picks a reasonably appropriate person for the job, its stock should see a bit of a “one less thing to worry about” bounce.