Why Did BMO Capital Upgrade Canopy Growth?



On Tuesday, Yahoo Finance reported that BMO Capital Markets upgraded Canopy Growth (NYSE:CGC)(TSE:WEED) from “speculative market perform” to “speculative outperform.” BMO Capital Markets also raised its target price from 25 Canadian dollars to 40 Canadian dollars. The new target price represents a 27.2% return potential from Canopy Growth’s stock price of 31.45 Canadian dollars as of Tuesday.

Tamy Chen and Peter Sklar of BMO Capital Markets think that if Canopy Growth manages to report a modest earnings beat in the third-quarter earnings on February 14, it could shift investors’ sentiments in its favor, as reported by Yahoo Finance. In their research, they said, “We believe there is a potential upside to street expectations for the fiscal third quarter of 2020 driven by the company’s pivot into a recreational product mix that should now be better aligned with demand.”

Chen and Sklar stated that they think that provincial sales increased sequentially in the fourth quarter of 2019. Also, the demand for value-priced brands was higher during this period. They think that the companies introduced value products to draw customers away from illegal markets.

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In the research note, the BMO analysts added that Canopy Growth wasn’t the only company to offer value products. The company could deliver better returns from its current level. They said that other companies might require additional financing. The analysts think that lower production costs could offset the negative impact of value products on Canopy Growth’s margins.

Analysts’ recommendations for Canopy Growth

Overall, analysts favor a “hold” rating for Canopy Growth. Among the 22 analysts that follow Canopy Growth, 11 recommend a “hold.” Meanwhile, ten recommend a “buy” and one recommends a “sell.” As of Tuesday, analysts’ consensus target price was 29.64 Canadian dollars, which represents a fall of 5.7% from its current stock price.

Stock performance

On Tuesday, after BMO Capital upgraded Canopy Growth, the stock rose to a high of 31.50 Canadian dollars. However, the stock fell and closed at 31.45 Canadian dollars—a rise of 10.8% from the previous day’s closing price. The stock has increased by 15.2% YTD as of Tuesday. The stock price rose due to the appointment of a new CEO, optimism about the introduction of Cannabis 2.0 products, the launch of a new CBD brand in the US market, and positive commentary from analysts. However, the delay in the introduction of cannabis-infused beverages offset some of the increases in the stock price. Also, Canopy Growth has outperformed its peers this year. During the same period, Cronos Group (NASDAQ:CRON) has returned 1.6%. Hexo (TSE:HEXO) and Aphria (NYSE:APHA) have fallen by 16.4% and 3.5%, respectively.


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