uploads/2019/10/AdobeStock_219673035.jpeg

Analysts Turn Bearish on Aurora, Other Cannabis Stocks

By

Updated

Analysts are increasingly bearish on cannabis stocks as the US–China trade war brings more uncertainty and volatility to the global market. The inverted yield curve in the US exacerbated fears about an impending recession. And the still-nascent cannabis industry just couldn’t escape the gloom.

In August, news about a serious lung disease associated with vaping started making the rounds. The issue took on crisis proportions when regulatory agencies started reporting deaths due to vaping. A few states started banning flavored e-cigarettes. This ban raised more concerns about vaping cannabis, a much-touted delivery mechanism in this industry. Even now, the vaping problem shows no signs of slowing. On October 17, the CDC reported 33 deaths and 1,479 lung injury cases associated with vaping as of October 15.

Article continues below advertisement

Hexo’s (HEXO) fourth-quarter pre-earnings announcement further painted a bleak picture of the future of the cannabis industry. This announcement not only pushed down Hexo stock but also share prices of almost all cannabis stocks. Today, the ETFMG Alternative Harvest ETF (MJ) and Cambria Cannabis ETF (TOKE) are down 18.93% and 28.67%, respectively, in 2019 year-to-date.

Against this backdrop, analysts have been increasingly voicing their opinions about the risks inherent in the cannabis sector. Analysts have become increasingly critical and bearish about the industry’s prospects.

Piper Jaffray reduces target prices for cannabis stocks

On October 8, Piper Jaffray senior analyst Michael Lavery explained his rationale for preferring certain cannabis stocks in an interview on The Exchange on CNBC. Then Lavery also highlighted the importance of selecting profitable cannabis companies with strong balance sheets.

On October 22, as TheFly reported, Michael Lavery reiterated his belief in his cannabis stock picks, Canopy Growth (CGC) and Cronos Group (CRON). The analyst is convinced about their cash positions and strategic priorities. However, he reduced his target price for Canopy Growth from $40 to $36. He also lowered his target price for Cronos from $18 to $12.

Article continues below advertisement

Michael Lavery also reiterated a neutral rating for Aurora Cannabis (ACB). He further reduced ACB’s target price from $7 to $4. The analyst claims there isn’t enough visibility on the strategic priorities of ACB. Lavery, however, is convinced about the growth potential of Tilray in both the US and European markets. So he has maintained his “overweight” rating for the stock. He reduced Tilray’s target price from $72 to $31.

BofA Merrill Lynch also reduces target prices for cannabis stocks

On October 16, as TheFly reported, BofA Merrill Lynch analyst Christopher Carey expressed concerns about the sustainable upside potential of cannabis stocks. This news followed the cannabis sector rally triggered by Aphria’s favorable first-quarter earnings performance. The analyst highlighted the need to reduce companies’ consensus sales estimates to bring them in line with the current environment. He claimed the cannabis industry is transitioning from a period of rising inventory to one where inventory is “de-loading.”

Article continues below advertisement

Christopher Carey also anticipates a reduction in consensus sales estimates for cannabis companies after third-quarter earnings. Per his revised sales estimates, Carey rated Cronos Group a “buy” but reduced his target price from $16 to $13. The analyst also rated Aurora Cannabis as “neutral” but reduced the target price from $6 to $5. He has rated Canopy Growth as “neutral” but also reduced the target price from $27 to $23. Finally, Carey reiterated his “underperform” rating for Hexo and lowered his target price from $2.5 to $2.

MKM Partners is also mostly bearish on cannabis stocks

On October 14, MKM Partners analyst Bill Kirk reiterated his “sell” rating for Aurora Cannabis. The analyst, however, reduced his target price from 5 Canadian dollars to 3.5. Bill Kirk has expressed concern about pricing pressures in the industry. The analyst is also worried about slower-than-expected store openings in Ontario and Quebec.

On September 20, TheFly also reported that MKM Partners analyst Bill Kirk initiated coverage of Cronos Group with a “neutral” rating and target price of 14 Canadian dollars. The analyst highlighted brand development, distribution network, and strong infrastructure partners as key strengths for the company.

Article continues below advertisement

Seaport Global mostly bearish on cannabis companies

On October 14, Seaport Global analyst Brett Hundley reduced sales and earnings estimates for several cannabis stocks. Subsequently, he downgraded Canopy Growth and Hexo from “buy” to “neutral.” The analyst also reiterated his “neutral” rating for Aurora Cannabis and Tilray.

He has rated Aphria as a “buy” but reduced its target price from $13 to $8. Hundley has blamed the slower-than-anticipated retail rollout in Canada for the industry’s increasing pricing pressures.

Stifel analyst Andrew Carter is also bearish about the cannabis industry

On October 10, Stifel analyst Andrew Carter expressed concern for the cannabis industry’s credibility due to Hexo’s dismal pre-earnings announcement. The analyst expressed worries about capital risk facing the cannabis industry.

He anticipates significant equity dilution for some cannabis companies and the inability to secure capital for many others. Carter believes Canopy Growth and Cronos Group enjoy a competitive advantage in this challenging environment due to strong balance sheets.

Article continues below advertisement

Some analysts are still optimistic about cannabis stocks

Contrary to popular opinion, on October 11, Jefferies analyst Owen Bennett upgraded Hexo stock from “underperform” to “hold.” He set a target price of $2.90 for the stock. Despite the weak pre-earnings announcement, Owen claimed a better understanding of the company’s risk profile.

Owen Bennett has recommended Aurora Cannabis, Green Organic Dutchman, and Aphria as his cannabis stock picks. The analyst, however, downgraded Canopy Growth from “hold” to “underperform.”

On October 9, Roth Capital analyst Scott Fortune also highlighted his belief in the growth potential of the cannabis industry. Fortune expects the sector to grow at a CAGR of 27% over the next three years. Similar to Piper Jaffray senior analyst Michael Lavery, Fortune also recommends that investors favor cannabis companies with strong balance sheets. He prefers cannabis stocks with positive EBITDA that are nearly breaking even.

Advertisement

More From Market Realist