Desjardins added more gasoline to the Canadian Marijuana stocks fire, as they initiated their coverage on HEXO Corp. (TSX: HEXO) (NYSE-A: HEXO), Aurora Cannabis (TSX: ACB) (NYSE: ACB), and Canopy Growth (TSX: WEED) (NYSE: CGC). Since the start of 2019, shares of HEXO were up as much as 148%, Aurora Cannabis 111% and Canopy Growth 98%. It seems that Desjardins believes there is still plenty of fuel left in all of these stocks as they gave all three buy ratings. HEXO seems to be the most noteworthy of their three picks, and they have set their price target at USD $10.41 per share, which is a 25.72% premium above today’s closing price of USD $8.28.
These picks may be worth looking at, but first, let us investigate why Desjardins is so bullish on the few and if the reasons can hold their weight.
Betting on Continued Limelight
Desjardins made it very clear to investors that they are expecting the hype to grow around Canadian cannabis stocks. Between the supply crunches and restrictions from the federal government in the United States, the Canadian companies have not really been able to stretch their wings and scale. Many companies took the leap, raised the finances, but only a few have their sights set on the right markets. HEXO has just begun expansion into Columbia and some parts of Europe and ranks as the 4th largest standalone producer in Canada. Aurora Cannabis already has its footprint all over the world, and Canopy Growth was just seen in the press buying the rights to own the large multi-state operator (MSO) Acreage Holdings (CSE: ACRG.U) (OTCQX: ACRGF), anticipating U.S legalization. Both of those companies seem to have much of that information priced in as they sit with valuations in the high billions. HEXO, on the other hand, sits at a modest USD $1.74 billion market cap and seems to have the most upside and room to grow.
Despite distribution obstacles and ramp up challenges, Canada is still the home to these trailblazing companies and it seems that Desjardins is akin to noticing this. They were also not shy to acknowledge that recreational cannabis sales in Canada since legalization were only $115 million, which would value the market at around $500 million per year in sales. Nowhere close to the estimated $4-5 billion dollar market that many investors and analysts were predicting. However, this doesn’t seem to scare Desjardins as little can be told in just a few short months from October 17th. Brands really need time to grow and operations need time to scale up. It’s quite the slow burn, but it needs to happen for things to settle into place, and most if not all long term investors understand this. What you are really buying alongside the eventual scale is all the intellectual properties and patents that these cannabis giants will soon have locked away in their vaults.
Also, a couple of weeks ago Bank of America initiated coverage on all three of the aforementioned stocks issuing them each buy ratings too. Surprising to some (but not to us), they listed HEXO as their top pick. BofA placed a price target of USD $10.48 (CDN $14) on HEXO shares. This represents a potential upside of 26.57% from today’s closing price of USD $8.28.
So is all of this a good enough reason to buy at these levels?
This remains the worry amongst all investors, however, the market, which looks seemingly healthy this far into the year, seems to speak for itself. Regardless of the expected losses; most of the anticipated profits are what keep investors hanging in. As we are already seeing in California, legal marijuana sales only generated half the tax revenue that was expected. Other U.S. states are also struggling to meet forecasts as they face an opposite issue of rampant dried flower oversupply, and an undersupply of other forms of cannabis products. Overall it may turn out to be more than just a Canadian problem. Either way, buy ratings stay strong as we await the full scale and global expansion ahead of these leading cannabis companies.
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Disclaimer: We are long HEXO stock.