The week started off extremely volatile for stocks with the indexes plunging on widespread fears about the Wuhan coronavirus.
The cannabis sector was not safe from this volatility, especially Canopy Growth (CGC - Get Rating) which sold off over 10% on Monday. However, sentiment rapidly reversed for the cannabis sector as Canopy Growth was upgraded by Bank of Montreal (BMO) on Tuesday. Shares recovered the majority of their losses rising over 10%.
Bank of Montreal’s cannabis analysts Tammy Chen and Peter Sklar raised their price target from $25 to $40, stating that value-priced brands, Canopy Broth’s in particular, are outselling higher-priced product lines in the retail market.
This makes sense to us as we know that combating the black market in Canada has been a serious issue from day one. Chen stated that, “Following the stock’s notable sell-off last year driven by a sub-optimal product mix (gel caps) and industry-wide challenges, we believe there is a potential upside to Street expectations for FQ3/20 driven by the company’s pivot into a recreational product mix that should now be better aligned with demand.” Chen also raised her target rating on the stock from “Hold” to “Buy.”
When it comes to market share, Chen and Sklar feel that Canopy Growth has made “meaningful market share expansion”. Canopy Growth’s line of value-priced brands most likely have taken market share from Aurora Cannabis and OrganiGram.
As licensed producers compete for market share this will inevitably bring the price of cannabis down, which should combat the black market in itself. The analyst’s had further positive remarks regarding Canopy Growth as they stated that, “While we believe the sector experienced some sequential increase in provincial buy-in calendar Q4 2019. We believe value-priced brands experienced stronger sell-in.” This reinforces their bullish case on Canopy Growth as investors demand higher revenues to support their valuation.
With operating expenses being a huge concern for Canopy Growth investors, Chen and Sklar also said that, “While value-priced products are lower margin, we believe this should be largely offset by a further reduction in costs from underutilized assets.”
This reinforces our bullish case for the cannabis sector as a whole for 2020. Companies need to reduce costs and essential “lean out” which means reducing their operating costs as much as possible. With the Canadian cannabis market showing signs of expansion, along with the edibles 2.0 market coming on board, 2020 could be a much better year for Canopy Growth.
Canopy Growth recently announced that they would be delaying their line of infused beverages until later into 2020. The company did say that it plans to provide an update on its drinks portfolio when it reports third-quarter earnings. Chen and Sklar expect the company to report revenue of $108 million which is an increase of $6 million from their previous estimate.
With a mountain of cash still on their balance sheet, Canopy Growth balance sheet is healthy. If the company can show progress in reducing operating expenses while growing revenues, this stock could rebound in a hurry.
CGC shares were trading at $23.46 per share on Thursday morning, down $0.06 (-0.26%). Year-to-date, CGC has gained 11.24%, versus a 1.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...
