When a company's leader leaves, investors often try to uncover the real reasons for the departure to determine whether there are problems with the business. Typically, a surprise departure isn't received as good news in the markets. Although in Canopy Growth's (NASDAQ: CGC) case, there hasn't been a sell-off since the company announced its chief executive officer would be retiring, at least not yet.
What could a change in CEO mean for the business? Would it make the cannabis stock a better buy, or would it be a red flag for investors?
Canopy Growth announces a succession plan
On Aug. 16, Canopy Growth posted a press release announcing that its CEO, David Klein, would be retiring. He will continue until the end of the company's fiscal year in March, but a search is underway for a successor to take over next year.
Klein has been with Canopy Growth since January 2020. He took over after the company fired Bruce Linton and concerns were rising about the cannabis producer's mounting losses. It was particularly troublesome for Constellation Brands, which invested billions into the company, and its losses were weighing down its financials. Klein was previously part of Constellation's business. However, Constellation has recently distanced itself from Canopy Growth's business and now only holds convertible shares in the cannabis company.
Although it's debatable whether the move has paid off for Canopy Growth -- its business remains unprofitable and cash burn remains a problem -- the company's board has "continued confidence" in the direction the business is heading.
CGC Net Income (Quarterly) data by YCharts.
Could this be a good move for the business?
A big concern I've seen with Canopy Growth's business is that under Linton and Klein, its focus has largely been on growth opportunities within the U.S. cannabis market. Although Klein has been trimming costs and making Canopy Growth's operations smaller, he has also helped launch Canopy USA, a special-purpose vehicle to hold all the cannabis producer's investments in U.S.-based cannabis companies. Canopy Growth can't close on acquisitions of Acreage Holdings and other multistate operators and report their results in its financials without running afoul of the Nasdaq due to the federal ban on cannabis.
Under a new CEO, there could be yet another pivot, this time away from the U.S. market and perhaps toward other opportunities. Rival Tilray Brands, for example, has been diversifying into alcohol to expand and improve its margins. If Canopy Growth were to follow suit and focus on growth opportunities in other industries, that could solve two big problems for the business -- achieving sustainable revenue growth and strengthening its financials.
However, until there's a new CEO or rollout of new plans, there's no reason at this point to suggest that the business will go in a much different direction. And if the board is indeed satisfied with the current path, there may not be an overwhelming push for a drastically different CEO to take over at Canopy Growth.
Should you buy Canopy Growth stock today?
Sometimes, there's a big movement in a stock's price when there's news of a CEO departure because it's often seen as a sign of trouble ahead. But in Canopy Growth's case, the cannabis stock has remained fairly stable since investors learned of Klein's retirement. Canopy Growth's stock is up a fairly decent 41% during the past 12 months. But over a five-year period, investors are still down a mammoth 98%; Klein taking over hasn't resulted in a better outlook for the business.
Canopy Growth remains a risky business regardless of who takes over; this latest news doesn't necessarily worsen matters.
When Klein took over, I thought that Canopy Growth would get serious about cutting expenses and stop obsessing over expansion into the U.S. Although expenses are lower, I still think there's too much focus on a U.S. market that is inaccessible for Canopy Growth. A new CEO may offer new hope and reasons for optimism, but regardless of who it is, investors may be better off waiting to see their strategy before buying shares of the pot producer.
Although the stock isn't necessarily a worse buy because of this development, it's also difficult to make the case that it will become a better investment as a result of a change in CEO. Staying on the sidelines probably remaina the best option for investors right now.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Brands. The Motley Fool recommends Nasdaq and Tilray Brands. The Motley Fool has a disclosure policy.
