After a brutal year in 2019, cannabis stocks are off to another rough start so far in 2020. Growth in the Canadian market hasn’t been as robust as previously expected, little progress has been made toward U.S. federal legalization and heavy losses are putting several top cannabis stocks in financial stress.
The long-term bull case for cannabis is still intact, but investors may need to continue to be cautious in the cannabis space this year to separate the stocks to buy on the dip and the ones to avoid at all costs. Here are seven cannabis stocks to buy, sell and hold, according to Bank of America analyst Christopher Carey.
Buy: Canopy Growth Corp (NYSE: CGC)
Now that investors have shifted their attention from growth to balance sheet health, Carey says Canopy is one of the best-positioned stocks to weather the cannabis downturn.
Canopy has a healthy cash position and a strong financial backer in minority investor Constellation Brands, Inc. (NYSE: STZ). Carey recently said Canopy will likely follow the lead of other Canadian producers and announce a cost cutting plan in the near-term. He said Canopy should potentially be able to lower its quarterly EBIT losses from around CA$170 million to as low as CA$30 million.
Bank of America has a Buy rating and $27.59 price target for CGC stock.
Sell: Aurora Cannabis Inc (NYSE: ACB)
Aurora and Canopy are the two largest Canadian cannabis producers by cultivation capacity, but the financial situations of the two companies are like night and day.
While Canopy appears to be on stable financial footing, Aurora’s massive cash burn, lack of a major financial backer and earnings-related debt covenants make Aurora a much bigger risk for investors. Last week, Aurora provided investors with a financial update that included the elimination of a EBITDA ratio debt covenant deadline of Sept. 30, 2020. However, the new covenant requires fiscal 2021 EBITDA of at least CA$50 million. Aurora just announced the removal of its founder and CEO, and Carey said the interim/new CEO has a big mess to clean up.
Bank of America has an Underperform rating and 94 cent price target for ACB stock.
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Hold: Aphria Inc (NYSE: APHA)
Following a CA$100 million equity offering in January, Carey said he has mixed feelings about the cash raise.
Carey said Aphria didn’t need to raise cash given its solid cash position, but the new funds give the company more financial flexibility. The downside is that the offering dilutes existing shareholders and was priced at an 11% discount to market price at the time. Carey said there are plenty of things to like about Aphria, but the company’s financial guidance will be difficult to achieve in the near-term.
Bank of America has a Neutral rating and $6.13 price target for APHA stock.
Buy: Cronos Group Inc (NASDAQ: CRON)
Carey recently said Cronos’ envious cash position gives it and its investors the luxury of patience, a rare commodity within the cannabis stock space these days.
Like Canopy, Cronos has a deep-pocketed minority investor in tobacco giant Altria Group Inc (NYSE: MO), and Carey said Cronos has the second strongest balance sheet in the group. In addition, he says Cronos management has an excellent long-term strategy and can afford to lag in revenue growth in the near-term as it establishes an asset base leveraged to high-margin areas of the cannabis value chain.
Bank of America has a Buy rating and $9.89 price target for CRON stock.
Sell: Hexo Corp (NYSE: HEXO)
Carey recently said HEXO management is taking all the right steps to improve the company’s outlook, but the stock is one of several in the cannabis space that simply still has too optimistic financial guidance.
Carey said recent spending cuts are encouraging, but cash is tight and it appears unlikely the company will hit its goal of profitability by the end of 2020. Applying a multiple of three times Carey’s projected 2021 sales of CA$163 million suggests there is limited upside for HEXO given the near-term financial risk the company is facing.
Bank of America has an Underperform rating and $1.15 price target for HEXO stock.
Hold: Tilray Inc (NASDAQ: TLRY)
The latest headlines for Tilray investors came last week when the company announced it's laying off 10% of its staff as part of a restructuring effort to cut costs. Carey says the layoffs are part of sector-wide cannabis cost issues and not an indication of unique problems at Tilray. Carey said Tilray has impressive portfolio diversification, but it's also plagued by many of the same issues weighing on the group as a whole: high valuation, unrealistic consensus expectations and a troubled balance sheet.
Bank of America has a Hold rating and $22 price target for TLRY stock.
Buy: Scotts Miracle-Gro Co (NYSE: SMG)
Scotts Miracle Grow is a global leader in lawn and garden products, but its Hawthorne hydroponics segment gives the company high exposure to the U.S. cannabis business.
Following the company’s fiscal first-quarter earnings report in late January, Carey said Scotts is on the right track to potentially beat market expectations, a rarity in the cannabis space these days. Carey said Scotts core lawn and garden business is a solid cash cow, providing plenty of access to capital. It’s Hawthorne business provides potential long-term upside, especially in the event of U.S. cannabis legalization.
Bank of America has a Buy rating and $135 price target for SMG stock.
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