Nawan Butt says now is the time for companies in the crowded cannabis sector to execute efficiently, helping to ease the overall downturn.
Canada’s cannabis sector — once a hub for investors looking to take advantage of a budding market — has been put under pressure by ongoing waves of volatility.
Several recent executives departures, cuts to staff and unsatisfactory quarterly results have come as a result of that same volatility as of late, but one expert says the current trend toward rightsizing will ultimately be to the industry’s benefit.
“Most of these cuts for costs will actually turn out to be positive and help the lifespan of these companies,” said Nawan Butt, a portfolio manager at Purpose Investments.
In an interview with the Investing News Network (INN), Butt noted that now is the time for companies within the crowded sector to execute efficiently, which will help ease the overall downturn currently facing cannabis.
Rightsizing has been an increasingly popular move on the part of some Canadian marijuana firms.
On Tuesday (February 11), The Supreme Cannabis Company (TSX:FIRE,OTCQX:SPRWF) let a total of 15 percent of its staff go in an effort to focus on “near-term revenue generating opportunities and creating a more nimble and effective corporate structure,” the company said.
Last week, both Tilray (NASDAQ:TLRY) and Aurora Cannabis (NYSE:ACB,TSX:ACB) made staff cuts. They followed Sundial Growers (NASDAQ:SNDL), which reduced its workforce in late January due to a slow store rollout and difficult market conditions.
Butt said that now the industry is working out the remnants of the “hysteria and hype” that propelled the space early on. That zeal led to producers spending too much money ahead of the launch of the market, Butt continued, instead of focusing on the consumer angle of the business.
A resilient black market and stunted retail segment also pushed down on the legal cannabis landscape, but the recent move towards tighter operations has signalled a better understanding of the consumer segment, Butt told INN.
He said, “(Companies now understand) they have to have tight operations, cost effective operations, to compete in this market where there’s a plethora of producers and really not as many consumers have switched over from the black market.”
Along with the cost cutting measures, a number of some of the more notable leaders in the sector have exited the space.
Aurora, for one, lost its long-time CEO Terry Booth after the executive announced his retirement last week alongside the news of some major changes to the company’s capital spending and operations.
The CEOs of Sundial, TerrAscend (CSE:TER,OTCQX:TRSSF) and Supreme shared a similar fate and have left their respective companies in the last few weeks as well.
The executive exodus isn’t entirely new, however. In Butt’s view, the firing of Canopy Growth’s (NYSE:CGC,TSX:WEED) former co-CEO Bruce Linton following some disappointing quarterly results last July foreshadowed the need to change the approach to generating profit.
The alcohol maker made a C$5 billion investment into Canopy in 2018, and in an interview with Squawk Box, Linton said the investment came with a condition to reconfigure the board of directors at Canopy.
“I think the board had decided they wanted a different chair and a different co-CEO,” Linton said previously.
Butt said friction at the top between the CEOs and the board of directors at some Canadian marijuana companies has revealed a need to adjust their outlook on the sector over all.
The termination of the former executive helped push the Canadian producers to understand that “there isn’t a blue sky scenario,” Butt explained, and along with general rightsizing, the sector will be in a much more stable position.
“This is actually a big positive move because it aligns everybody’s interests, from the shareholders to the stakeholders to the (licensed producers) themselves,” Butt told INN.
The view hasn’t been shared by some experts in space.
Last month, Evolve Funds Group decided to shutter their two cannabis-focused funds, the Evolve Marijuana Fund (TSX:SEED) and the Evolve US Marijuana ETF (NEO:USMJ). The funds will be closed by late March.
SEED, Evolve’s globally focused cannabis fund, has a majority of its holdings in Canadian companies and has also lost over half of its value in the past six months.
Elliot Johnson, the chief investment officer at Evolve, told INN the decision to close down the funds was ultimately done in view of the market’s difficulties.
“In Canada, we really feel that there’s been a significant over-regulation and mismanagement of the rollout of legalized cannabis in this country,” said Johnson.
“We think that there’s a lot more hurdles in front of these businesses than people may have been expecting back … (when) legalization day happened in October 2018,” Johnson added.
As for the job cuts, Butt said that overall, they don’t account for a significant portion of the total workforce in cannabis.
And with the trend towards streamlining operations, Butt told INN that the marijuana firms are now on a better path towards optimization.
“This really sets up Canada and Canadian LPs to now start distinguishing themselves on operations, where you’ll start seeing the winners and the losers, the winning strategies and losing strategies, really start moving away from each other (in) a decoupling, essentially.”
Butt said Canadian firms now have the next few quarters to prove their business models as they move towards profitability or towards losing less money at this point, he said.
“I think this is the sort of soft catalyst that you need for these LPs to refocus their efforts to become profitable and make this industry sustainable and viable in the long term, rather than just being an accumulation of assets at wild valuations.”
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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.