Last year was supposed to be when the cannabis industry demonstrated to Wall Street that it was deserving of its lofty premium and could become profitable on a recurring basis. Of course, hindsight being what it is, we know that didn't happen. Instead, marijuana stocks actually logged their worst year to date.
To our north, Canadian pot companies were clobbered by regulatory issues that led to supply shortages in some provinces and rampant oversupply/bottlenecks in others. Meanwhile, in the U.S., high tax rates in a number of core cannabis markets have made it difficult for legal growers to compete with illicit producers. Ultimately, pot stock valuations cratered, and most cannabis companies delivered disappointing operating performances in 2019.
It's been a game of musical chairs for cannabis CEOs of late
Unfortunately, while the changing of the calendar year allows year-to-date returns to reset, it hasn't been able to wipe the slate clean for the CEOs in charge of these poor-performing marijuana stocks. Over just the past eight months, we've seen eight pot stock CEOs leave their post.
- Bruce Linton, former co-CEO, Canopy Growth (CGC -6.66%): fired in early July.
- Mark Zekulin, former co-CEO/CEO, Canopy Growth: stepped down in December.
- Terry Booth, former CEO, Aurora Cannabis: stepped down in February.
- Adam Bierman, former CEO, MedMen Enterprises (MMNFF -4.35%): resigned in late January.
- Peter Aceto, former CEO, CannTrust Holdings (CNTTQ 0.00%): fired in July.
- Navdeep Dhaliwal, former CEO, Supreme Cannabis: resigned in January.
- Torsten Kuenzlen, former CEO, Sundial Growers: resigned in late January.
- Jim Hamilton, former CEO, Neptune Wellness Solutions: resigned in July.
If I'd moved the needle back to the beginning of 2019, we could also include Aphria (APHA), Namaste Technologies, and Liberty Health Sciences among the CEO turnover.
What's more, this provides just a small snippet of the management changes occurring on an almost weekly basis within the marijuana space. Chief financial officers, chief operating officers, and board members have been replaced with increasing frequency in the cannabis space over the past year.
Why, you ask? Let's take a closer look.
If investor trust is lost, pot stocks CEOs need to go
Probably the biggest reason we've witnessed such a rapid increase in marijuana stock CEO turnover has to do with a lack of investor trust. It's a lot easier to fix internal problems with a company than it is to rebuild trust with Wall Street and investors. As a result, CEOs in charge of companies that failed to maintain the trust of shareholders were shown the door.
The most blatant example of this comes from CannTrust, which admitted to growing cannabis illegally in five unlicensed rooms at its flagship Niagara campus for a period of six months (October 2018-March 2019). This in itself was bad enough and merited the departure of Peter Aceto. However, additional evidence came to light during the investigation into this illegal grow that Aceto knew about it, yet did nothing to stop it. This is what led to Aceto's termination with cause in July, and it's the reason CannTrust's cultivation and sales licenses remain suspended by Health Canada.
Moving the needle back a bit further, the story is similar for Aphria, albeit nowhere near as severe. In Dec. 2018, Aphria was alleged by two sell-side firms to have committed multiple counts of fraud. Following a months-long review by an independent committee, most of these allegations were debunked. However, the independent committee did uncover conflicts of interest among certain executives regarding the purchase of assets in Latin America. This finding effectively sealed longtime CEO Vic Neufeld's fate, leading him to step down.
Operating results actually matter now
The other major reason marijuana stock CEOs have found themselves on the outside looking in has to do with operating performance. With Canada officially legalizing adult-use weed and commencing sales in October 2018, promises no longer held as much weight as actual results.
There's little doubt that Canopy Growth's co-CEOs Bruce Linton and Mark Zekulin were pushed aside for paying too little heed to the company's operating performance. As part of Constellation Brands' (STZ 0.80%) $4 billion equity stake into Canopy in November 2018, it also garnered quite a few seats on Canopy's board. With share-based compensation sending Canopy's losses ever-higher, and Constellation even contending with losses stemming from its equity stake, it had little choice but to fire Linton and put in motion a plan that would replace Zekulin as CEO. Canopy Growth's new CEO, David Klein, is the former CFO at Constellation Brands, and he'll be tasked with some serious belt-tightening at the largest pot stock in the world by market cap.
The same can be said for vertically integrated multistate operator MedMen Enterprises, which only recently saw CEO and co-founder Adam Bierman step down. MedMen looks to be running on fumes after a nearly $232 million operating loss in fiscal 2019. Even with concerted efforts to reduce its general and administrative expenses, and the company calling off its acquisition of privately held multistate operator PharmaCann, it's unclear if MedMen has the capital to survive.
Long story short, with investor patience running thin on cannabis stocks, CEOs simply don't have that long of a leash. With an industry shakeup well under way, it would not be in the least bit surprising if this maddeningly high rate of pot stock CEO turnover continued throughout 2020.