Vaping and Cannabis Stocks: Piper Jaffray Weighs In


Nov. 20 2020, Updated 11:34 a.m. ET

The vaping crisis is quickly proving to be an issue for the entire cannabis sector. On August 17, the CDC (Centers for Disease Control and Prevention) announced an ongoing investigation studying the link between pulmonary illnesses and e-cigarette use, or vaping. The investigation covered 94 cases of lung illnesses from 14 states in the US, which were all reported between June 28, 2019, and August 15, 2019.

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The number of potential cases investigated had swelled to 193 as of August 22. The CDC started investigating the cases reported in 22 states between June 28, 2019, and August 20, 2019. On August 23, Illinois’s Department of Public Health reported the first potential death case associated with vaping. On October 1, the CDC announced that the number of lung injury cases associated with vaping had increased to 1,080. By October 9, the estimated death toll associated with vaping had increased to 24.

Since August 1, sector ETFs such as the ETFMG Alternative Harvest ETF (MJ) and the Cambria Cannabis ETF (TOKE) have fallen 25.65% and 25.49%, respectively. Prominent cannabis players Aurora Cannabis (ACB), Canopy Growth (WEED) (CGC), Tilray (TLRY), and Cronos Group (CRON) are down 29.74%, 26.78%, 40.84%, and 32.68%, respectively. Vaping concerns have definitely proved to be a dampener for the entire cannabis sector.

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Piper Jaffray analyst comments on vaping

On October 8, Piper Jaffray senior analyst Michael Lavery voiced his opinions about the impact of vaping on cannabis stocks in an interview on The Exchange on CNBC. He explained that vaping concerns may ironically prove beneficial to regulated cannabis players in the long term. This, however, would require regulatory authorities to definitively prove a link between black market products and illnesses.

On September 14, a Reuters report identified two illicit marijuana vape products, Chronic Carts and Dank Vapes, as the possible culprits causing vaping-related lung illnesses. However, this evidence is scant, and more proof will be required to clear the names of regulated cannabis products from the vaping-related allegations.

The October 8 episode of The Exchange also highlighted the difficulty cannabis companies may face in raising capital due to the ongoing vaping crisis. Hence, investors are advised to be on the lookout for companies with stronger balance sheets.

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Piper Jaffray analyst highlights his cannabis picks

Lavery reiterated his cannabis picks: Canopy Growth, Cronos Group, and Green Thumb Industries (GTBIF). He attributed the recommendations mainly to the companies’ strong balance sheets due to cash infusions from strategic investors. At the end of June, Canopy Growth and Cronos Group had cash worth $2.43 billion and $1.77 billion, respectively, on their balance sheets. Canopy reported long-term debt of $1.57 billion, but Cronos had no debt on its balance sheet. Green Thumb had cash worth $135.76 million and long-term debt of $96.13 million on its balance sheet.

On October 1, Lavery reiterated his “overweight” rating Canopy Growth, but he reduced its target price from $49 to $40. The analyst foresees risks associated with vaping and a slower retail rollout in Canada. However, he has expressed confidence in Canopy Growth’s capital allocation strategy.

On August 12, Lavery initiated coverage for Cronos Group with an “overweight” rating and a target price of $18. This initiation followed the company’s second-quarter earnings results, during which it surpassed the consensus revenue estimate.

On August 13, Lavery also initiated coverage for Green Thumb Industries with an “overweight” rating and a target price of $13. The analyst believes that the company is targeting a long-term growth opportunity worth $70 billion–$140 billion in the US.

Target prices for Piper Jaffray’s latest cannabis picks

Currently, 21 analysts are tracking Canopy Growth on the Toronto Stock Exchange. They have given its stock an average target price of 51.71 Canadian dollars. This target indicates a potential upside of 69.82% in the next 12 months based on the stock’s last closing price. Four analysts are tracking the company on the NYSE. They’ve given it an average target price at $34.77, a potential upside of 52.30% based on its last closing price.

The average target price for Canopy Growth fell in both the US and Canada after the recent Bank of America downgrade. In Canada, Canopy Growth’s consensus target price fell from 55.73 Canadian dollars in September to 51.71 Canadian dollars in October. In the US, its target price fell from $35.69 in September to $34.77 in October.

Fourteen analysts follow Cronos Group in Canada. They’ve set its target price at 18.63 Canadian dollars, a potential upside of 63.42% based on its last closing price. In the US, two analysts have set its consensus target price at $18, which implies a potential upside of 110.04% based on its last closing price.

Reputed research houses Canaccord Genuity and BMO Capital Markets, along with CNBC’s Mad Money host, Jim Cramer, have been recommending Cronos stock. However, it fell in the first week of October. The fall happened after CIBC lowered its price target from 25 Canadian dollars to 20 Canadian dollars.

Fourteen analysts are currently tracking Green Thumb Industries. They have given it an average target price of 24.97 Canadian dollars. This implies a potential upside of 103.34% based on its last closing price on the Canadian Securities Exchange.


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