Cannabis stocks represent potentially lucrative investing opportunities. However, given the significant uncertainty on the developing competitive and regulatory backdrop, there’s a sizable dose of risk attached. One way to navigate this risk is to follow the recommendations from Wall Street analysts. Bank of America’s Christopher Carey covers a number of the most interesting cannabis stocks. He sees a number of lucrative opportunities in cannabis stocks right now. Here are 3 stocks the analyst is recommending, and 1 cannabis stock that it’s better to avoid… Let’s dive in now:
HEXO Corp (HEXO)
This is the number one cannabis stock for Carey. The analyst sets out his bullish reasoning here: “HEXO is our Top Pick in cannabis, screening compelling in our valuation framework vs peers (EV/sales and DCF), and with fundamentals grounded by the most de-risked cannabis supply in Canada (off-take with Quebec), an innovation-forward organization and potential for additional value-add partnerships (beyond that already developed with Molson Canada).” The analyst has just reiterated his buy rating on the stock with a $10 (indicating a healthy 38% upside potential).
The adult-use cannabis brand also receives the thumbs up from top-rated Oppenheimer analyst Rupesh Parikh. He has just spent time with management of HEXO including cofounder and CEO Sebastien St-Louis. Most encouragingly, HEXO management continues to feel comfortable delivering on FY20 revenue guidance of $400M, with potential upside from Us expansion or adding a new strategic partner says Parikh.
At the same time, the analyst is also impressed by the company’s growing pipeline of innovative products and patent portfolio. “Although specifics are limited, we overall walked away increasingly confident in the pipeline of innovation to support future product launches catering to different product experiences such as sleep, focus, and sport on the CBD side and sex and fun on THC side.” What’s more management is making the right decision to aggressively invest additional resources on the R&D side and expects to have 100 scientists, up from ~20 today.
Net-net: “We believe HEXO remains well positioned to at least capture its fair share of the Canadian market, and we overall walked away increasingly confident in the company’s strategy in a dynamic regulatory and competitive backdrop” Parikh tells investors. See what other Top Analysts are saying about HEXO.
Canopy Growth Corp (CGC)
Widely accepted as the global leader of cannabis stocks, Canopy isn’t going anywhere in a hurry. For Carey, Canopy’s 6 million square feet of production capacity combined with the $4 billion Constellation Brands (STZ) partnership perfectly position the stock as a long-term market leader. This should enable the company to expand into products higher on the value chain.
And now the company has just made a very savvy decision by snapping up Acreage Holdings. Alliance Global Partners analyst Aaron Grey sees this as a ‘critical game changer’. The $3.4 billion deal opens up the world’s largest cannabis market in the US to CGC, subject to federal legalization occurring within the next 7.5 years.
Canopy’s acquisition price will end up a bargain,” writes the analyst, adding
that “While current market share is primarily indicative of production
capabilities, we view Canopy’s R&D behind novel form factors as well as
branding through a combination of products and retail, as allowing the company
to maintain its market leadership.”
If we look at only ratings from top-performing analysts, CGC scores a very bullish ‘Strong Buy’ consensus. That’s with five back-to-back buy ratings in the last three months. See what other Top Analysts are saying about CGC.
Aurora Cannabis (ACB)
Last but not
least, Bank of America is also coming down in favor of Aurora Cannabis. Unlike
many other cannabis companies, Aurora is operating on a global scale, and Carey
also notes that the company still lacks a major partnership (unlike CGC for
example). Should such a partnership be announced going forward this could be a
major catalyst for the stock says Carey.
analyst did express some reservations about Aurora’s current strategy. Following
the company’s mixed earnings report, Carey wondered whether Aurora should be expanding
from its current strategy of vapes and edibles and into the ‘next frontier’
i.e. cannabis-focused beverages.
“We see the
strategy as reasonable; however, with so many companies also focused on these
areas, and very few with the scale or capabilities to build advantages in
untapped areas like beverages (with the exception of Canopy and Hexo), we
wonder if Aurora could be ‘missing the boat’ on an area which could prove large
as newer consumers wanting less pervasive, socially accepted product forms
demand both psychoactive (THC-infused) and CBD beverages,” Carey told investors
on May 16.
According to Zenith Global canna-beverages should become a $1.4 billion market by 2023- a very rapid explosion from just $89 million in 2018. Like CGC, Aurora also sports a ‘Strong Buy’ Street consensus. Out of six analysts covering the stock, 5 rate ACB a buy. See what other Top Analysts are saying about ACB.
But don’t buy:
Cronos Group Inc (CRON)
In the last year CRON shares have exploded by 154% thanks to a $1.89 billion investment from tobacco giant Altria Group (MO). And this is exactly the reason that Christopher Carey believes this is a stock to avoid. According to the analyst this impressive rally means that the company’s strong balance sheet is now more than accounted for.
And it seems the Street shares such reservations; Cronos receives a ‘Hold’ consensus from analysts. Five-star GMP FirstEnergy analyst Martin Landry also gave this cautious analysis of the stock: “Cronos is testing investor patience with a slow production ramp-up and bottlenecks for processing and packaging. While Cronos’ shares have declined significantly from their 52-week high, we see limited near-term catalysts and investors should await a better entry point,” says Landry.
However, he anticipates that production issues will be resolved before the summer, which should result in a stronger 2H19. Note that this is one of the Top 20 analysts tracked by TipRanks out of over 5,100 analysts for his stock picking ability. See what other Top Analysts are saying about CRON.
Looking for fresh investing inspiration? These are the ‘Strong Buy’ stocks Wall Street’s best-performing analysts are recommending now…
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Source: TipRanks Blog