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Why I Won't Be Buying Stock in Bruce Linton's Next Pot IPO

By David Jagielski - Updated Apr 1, 2021 at 8:12AM

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The former Canopy Growth CEO is taking another pot company public.

Canopy Growth (CGC 10.34%) enjoys some of the best name recognition in the cannabis industry. A lot of the credit certainly goes to former CEO Bruce Linton, who did a great job of not just growing the business, but getting investors excited about the industry's long-term prospects. Earlier this year, the company's valuation topped $18 billion. And although the popular pot stock faces a challenging road ahead while it tries to cut costs, it has still made some early investors rich, up 880% since its IPO in 2014.

Today, Linton is leading a different business, Gage Cannabis. The company is looking to make its public debut as early as April on the Canadian Securities Exchange. Many think that this could be the next hot pot stock. But despite the hype, I don't think you should rush out to buy shares of the company.

Trimming weeds.

Image source: Getty Images.

It may not be easy getting investors on board

The cannabis industry has changed significantly over the fast few years, and the field's players are getting bigger and badder. For those reasons, investors shouldn't expect Canopy Growth-like returns with Gage. With big names like Trulieve CannabisCuraleaf, and Green Thumb Industries, along with Aphria and Tilray merging, the new cannabis company is entering a much more crowded (and competitive) field than Canopy Growth faced in its early stages.

Investors have more options to choose from, and it may not be easy to convince people to buy shares of a small company like Gage versus a large multistate operator with a growing presence in the U.S. Gage currently focuses on the Michigan market, and on March 5 announced the opening of its seventh location. The company looks to bank on its deal with Cookies, a popular cannabis lifestyle brand that offers a wide range of products. Gage is the only dispensary in the midwest that sells Cookies.

That it operates in one state and is banking on the success of one brand are hardly reasons to invest in Gage. In a press release on Nov. 26, 2020, Gage said that its sales over the past three quarters (January through September of 2020) totaled $30.9 million. That's a drop in the bucket compared to the sales of large multistate operator Curaleaf, which in just its most recent quarter (period ending Dec. 31, 2020) were $230.3 million. Gage does expect to have more than 20 locations by the end of this year.

Previously, Linton just needed to get investors excited about the cannabis industry to get people buying up Canopy Growth, as it was the biggest and most notable name in the sector. In Gage's case, the smaller company also needs to show it is a better buy than the alternatives. And that includes a strong bottom line.

Expectations are higher

Cannabis investors no longer focus solely on impressive sales numbers: Profitability is also growing in importance. The multistate operators noted above are all generating positive adjusted EBITDA numbers. And keeping costs down hasn't exactly been Linton's strong point in the past. When he was let go from Canopy Growth in July 2019, the company had just reported its year-end numbers, which weren't good -- its adjusted EBITDA was negative 257 million Canadian dollars for the year ending March 31, 2019. Constellation Brands, which invested $4 billion into the cannabis company in 2018, ultimately replaced Linton with its CFO, David Klein, who has been working on bringing costs down. Today, Canopy Growth still struggles with profitability: It most recently incurred an adjusted EBITDA loss of CA$68.4 million for the quarter ending Dec. 31, 2020. However, it plans to get out of the red in fiscal 2022.

Linton was arguably too focused on expanding into the U.S. and on a potential deal with multistate operator Acreage Holdings at the time. The deal still isn't closed today due to the federal prohibition of marijuana, and will stay that way until widespread legalization occurs. 

Investors should be careful with Gage

Michigan is a great market that generated around $1 billion in sales last year, and Gage could be a great means of tapping into that market's growth. Focusing on one state has worked well for Trulieve, which dominates the Florida market with 79 dispensing locations. Its shares have soared more than 380% over the past year, outperforming the S&P 500 and its 50% returns over that time frame.

However, my concern with a Linton-led company is that it may focus on the wrong things (e.g., sales growth versus sustainability and profits). While he is a terrific sales guy who can promote a business, I believe investors will be more skeptical this time around and that revenue growth alone won't be enough to cause the stock to rise in value. And that's why I wouldn't jump on Gage's stock out of the gate, as it could underperform in an industry that's starting to get a bit crowded. Investors have plenty of solid cannabis companies to choose from that are much safer bets over the long term.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$5.55 (10.34%) $0.52
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
STZ
$244.37 (0.55%) $1.34
Tilray Stock Quote
Tilray
TLRY
Green Thumb Industries Stock Quote
Green Thumb Industries
GTBIF
$11.60 (-2.11%) $0.25
Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
CURLF
$6.22 (1.55%) $0.10
Aphria Stock Quote
Aphria
APHA
Acreage Holdings, Inc. Stock Quote
Acreage Holdings, Inc.
ACRGF
Trulieve Cannabis Stock Quote
Trulieve Cannabis
TCNNF
$14.65 (3.74%) $0.53
Acreage Holdings, Inc. Stock Quote
Acreage Holdings, Inc.
ACRH.F
$0.99 (4.74%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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