Photograph by Esteban Lopez
Cannabis stocks have been a volatile but largely outperforming group in 2019. Yet Bank of America Merrill Lynch warns that while some companies are living up to the hype, others have risen too far, too fast—and investors could get burned.
The back story. Plenty of marijuana stocks, including Aurora Cannabis (ACB),Canopy Growth (CGC), and Cronos Group (CRON), have soared over 50% in 2019. Everyone from institutions to consumer-staples giants and retailers has been looking to get exposure to what’s predicted to be a major growth market, from recreational use to medical applications and related products like CBD oil.
Yet it’s been far from a straight shot upward for the group, which has been hit hard by earnings results, insider selling, banking restrictions, analyst skepticism, and the struggle of getting quality supply—or any supply, in some cases.
Then there’s the fact that while marijuana is legal in Canada, the picture is less clear in the U.S., as individual states make their own rules for (or against) legalization, and federal approval doesn’t look imminent. That’s left investors scrambling to guess which companies will ultimately succeed in this ever-shifting landscape.
What’s new. On Wednesday, Bank of America Merrill Lynch’s Christopher Carey initiated coverage on a handful of cannabis stocks, with three Buy ratings and one Underperform. His bullish picks are Aurora Cannabis, Canopy Growth, and HEXO (HEXO), with the latter the most attractive of the trio, while he thinks investors should steer clear of Cronos.
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Carey expects an underdeveloped supply chain will continue to crimp Canadian cannabis companies, and while the market appears to be bracing for that, his estimates for 2019 and 2020 are still below consensus. Yet he still thinks in this environment that his Buy-rated stocks can outperform.
Looking ahead. Given how recently marijuana prohibitions have started to crumble, it isn’t surprising that there’s a lack of infrastructure to meet the new legal demand. Carey argues that a number of these issues are temporary, meaning that recent pullbacks could be a buying opportunity.
“We think distribution channel constraints in Canada could prompt companies, namely larger ones with capital, to seek strategic actions in international jurisdictions, including potential for deals in the U.S. and Europe; indeed, the longer Canada channel issues persist, the more likely these actions become, in our view, a catalyst,” he writes.
Aurora Cannabis stocked closed up 1.1% the day of the report, to $11.95 per share, while Canopy Growths stock gained 2.8% to close at $42.85. HEXO stock rose 11.4% to $6.63, and Cronos stock was up 0.8% to $15.92.
Carey’s price targets for Aurora, Canopy, HEXO, and Cronos are $11, $52, $10, and $13, respectively.
More at: Barrons.com