“We call the bottom on Canadian cannabis stocks.” That’s the first line in a 264-page research note from Cantor Fitzgerald analyst Pablo Zuanic. He’s predicting “green days ahead” for the battered shares that have struggled to find their footing since Canada legalized recreational pot more than a year ago.

The Horizons Marijuana Life Sciences Index ETF (HMMJ.TO), the first exchange-traded fund for cannabis shares, has declined more than 47 per cent in the past year. Lacklustre earnings, a persistent black market, scores of U.S. pot firms listed on Canada’s junior exchange, abrupt boardroom shuffles, and the slow demise of CannTrust (TRST.TO)(CTST) have collectively dampened investor enthusiasm for the HMMJ’s core holdings of big Canadian cannabis players.

Zuanic initiated coverage on six cannabis stocks in a lengthy report released on Monday, all of them among the top ten holdings in the HMMJ.

“We call the bottom on Canadian cannabis stocks and think positive catalysts far outweigh negative ones,” Zuanic wrote in the report.

He initiated coverage of the following:

• Aphria (APHA.TO)(APHA) with an “overweight” rating and a $10.40 price target

• Organigram (OGI.TO)(OGI) with an “overweight” rating and a $17.10 price target

• Aurora Cannabis (ACB.TO)(ACB) with a “neutral” rating and a $5.10 price target

• Tilray (TLRY) with a “neutral” rating and a $20 price target

• Canopy Growth (WEED.TO)(CGC) with a “neutral” rating and a $27 price target

• HEXO (HEXO.TO)(HEXO) with an “underweight” rating and a $2.40 price target

Zuanic’s bullishness is based on a long list of anticipated shifts in the market, such as improving recreational sales and more store openings, the advent of beverages and vapes, consolidation, more insurance coverage and lower taxes for medical cannabis, and the potential for more consumer packaged goods companies investing in the sector.

“Valuations are at two-year lows, and we deem them attractive based on the long-term opportunity,” he wrote. “The stocks that will outperform will show evidence of a strengthening Canadian franchise [market share, pricing, and margins] and outsized growth versus peers in terms of exports.”

Zuanic sees the Canadian recreational market expanding to $2.44 billion in sales in 2020 and $4.5 billion by 2022. He expects the domestic medical market to grow to $850 million by 2022, with international medical sales reaching $2.7 billion that same year.

‘Looming risk’

A number of major cannabis producers will report third-quarter financial results next week, including Canopy, Cronos (CRON.TO)(CRON) and Tilray.

BMO Capital Markets analysts Tamy Chen and Peter Sklar note that some of the larger licenced producers have provided cautious commentary for their near-term revenue expectations.

They also warn that provinces looking to manage their inventory ahead of the release of next generation pot products, expected to hit shelves in mid-December, may return less popular items to producers.

“Limited warehouse capacity at Ontario and Alberta may have already resulted in product returns, with potentially more to come ahead of the Rec. 2.0 sell-in,” the pair wrote in a research note on Monday. “We also remain concerned about the looming risk of more inventory write-down, particularly if some of the dated flower is ultimately deemed not extraction grade.”