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Canopy Growth (CGC) Getting Knocked Down a Peg is Good for the Company and Sector

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Canopy Growth (CGC) has been taking a beating lately, as it has taken it on the nose after its disappointing earnings report and co-CEO Bruce Linton getting fired.

Of particular note has been the failure of revenue to reach expectations, and worse than expected losses. Add in the fact Canopy migrated some of its medical business to its recreational business, and its recreational pot revenue performance was even worse.

Being the former face of the cannabis sector, it has been devastating on the industry, as many companies have been under pressure since the weak performance of Canopy.

The good news to me is Canopy Growth isn't likely to recover from the hyped-up expectations surrounding it, and that means expectations for the company and industry will lowered to more realistic levels, and after the bearish sentiment dissipates, there should be a nice rebound for Canopy and the industry in general; although I think isn't likely to enjoy the change in sentiment as much as its competitors will, primarily because of the decision to release Linton of his duties.

No longer the face of the industry

I have never thought of Canopy Growth as being the face of the cannabis industry, and the benefit it got from that media designation is not longer in place in my view. This suggests the leverage it got from the media reporting positively on just about everything it did, is no longer in play. That's a major part of the reason I don't believe it's going to get as much impetus from the upcoming reversal in negative sentiment as other companies.

That's a positive in my view for a couple of reasons. First, as it relates to Canopy Growth, future expectations are going to be more subdued, and that should bring about less volatility in the share price of the company over time. From now I think it's going to be considered a decent, not a great company.

On the other hand, if there are some major issues on the recreational pot part of its business, it could have to endure a lot more downward pressure on its share price before it finds a bottom.

The other problem is it's now changing how it plans on growing, as evidenced by the ouster of Linton, and that presents a very uncertain outcome as to how it'll work out.

Constellation Brands has taken de facto control of the company

Now that Constellation Brands has effectively taken control of Canopy, it has produced a lack of clarity as to how things are going to work out going forward.

While it has downplayed the decision to get rid of Linton, saying it wasn't related to financials and performance, that can't be taken seriously. The idea the company is entering into a different phase of growth that required different management is a disingenuous assertion at best.

There is no doubt in my mind that Constellation is going to move forward at a less ambitious pace, and it remains to be seen whether or not that transitions into profitability.

After all, Constellation Brands took a big piece of Canopy Growth because its own core business was struggling to find meaningful growth because of declining consumer demand for its core products.

So when taking over the direction of Canopy via its own management team, it is far from a certainty that Constellation will be able to make the right decision on the type of manager the company really needs.

Like I've been on the record saying for a long time, I've never been a big fan of Canopy Growth because of the holes in its business model I saw, such as heavy exposure to Canadian recreational cannabis and its weak international growth.

To me, the decision to make a bid for Acreage Holdings as the means of entering the U.S. market was also a bad one. The assumption the U.S. will legalize recreational pot isn't based on reality in my view. Much of the carryover from Canada legalizing

adult-use pot was presented by the media as a surety in the U.S. Not only is that not the case in the near term, but very unlikely for many years, if it ever happens.

Conclusion

I've never felt comfortable with Canopy Growth being presented as the face of the cannabis industry, knowing it was going to take down the entire industry with it when it started to falter. That is now happening.

A lot of sentiment has turned negative on the cannabis sector in general, and Canopy Growth in particular.

In the future, what's good about this at the macro level is what happens to Canopy isn't going to have the type of impact on the market as it's having today. Those days are over, and it's good for the market for the long haul.

For Canopy, it puts the company is a more realistic position as measured against its competitors. I think expectations for the company will never be the same, and the emotion that had been driving its share price up has been significantly weakened.

With that in mind, there is going to be a lot closer scrutiny of the company than in the past, and that deeper dive will result in a more measured outlook concerning the performance of Canopy.

For that reason the new CEO should have an easier job, but since much of the luster has worn off of Canopy, it's going to be hard to convince the market it has the growth potential it was thought to have a short time ago.

With a lot of its competitors having significant growth probabilities in the years ahead, it's going to be hard to sustainably attract growth investors for some time, until it proves it still has a strong growth strategy in place, while lowering costs and showing it has a path to profitability.

There are now a number of growth companies better than Canopy in the cannabis sector, and it's going to get tougher for it to catch a solid bid.

I'm not saying investors can't or won't make money on Canopy Growth in the future, only that the growth trajectory of the company has definitely contracted; expectations should be lowered.

Overall, Canopy stock has 7 bullish analysts in its corner vs. 5 analysts playing it safe on the sidelines. The 12-month average price target (from the pool of Street-wide expectations) showcase 47% in upside potential for the stock. (See CGC's price targets and analyst ratings on TipRanks)