Jefferies Not as High on Cannabis Stocks Now: Ratings and Price Target Cuts

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For years, the general consensus on Wall Street is marijuana would never be legalized. Then the overall attitude started to change and laws gradually are changing. Legalization in Canada and recreational legalization in 11 U.S. states drove a buying frenzy that pushed some of the stocks to incredible levels. However, the buzz is wearing off, as short sellers have attacked these stocks and share prices on many of the top companies have been hammered.

To add insult to injury, Jefferies is out with a report cutting some price targets and ratings that comes as kind of a surprise, given the sharp sell-off in the industry over the past two months. The firm does make the case that these stocks probably will see a washout over the next year, and the report noted this:

With a number of negative headlines impacting the cannabis sector the last 6 months, and still with little sign of profitability, the sector has seen greater risk/volatility priced in. Capturing this greater risk profile, we lower price targets by an average of 50% across our coverage. Next 12 months price performance should see strong divergence between those who can execute/move to profit and the rest.

The call by Jefferies is one of caution, but the analysts do note that as the market matures and expands, things should improve as companies march toward profitability. The expectation that the United States will one day legalize recreational marijuana at the federal level is the driving force for many long-term investors. Jefferies said this about future growth:

Our US estimates increase slightly with more visibility on rec states such as Illinois, with total market including medical in 2022 now at $22.4 billion vs $21.7 billion previously. Despite Canada sales showing signs of improvement in recent months as supply has improved there is still significant opportunity for a material uplift, even before derivative products are introduced, should the number of retail locations increase, with the situation nowhere near where it ought to be (early data showing a strong correlation between number of retail stores and sales.

The analysts still have some top picks that remain Buy rated, but the caution expressed over growth is something for investors to remain wary of in the near term. We tracked the Jefferies changes in Canadian and U.S. dollars. We also focused only on the stocks that trade on U.S. exchanges.

Aphria Inc. (NYSE: APHA) remains Buy rated but the price target on the company was lowered to $11 Canadian from $15. In U.S. dollars, that equates to an $11.25 target being dropped to $8.30. The shares were trading in New York early Friday at $4.70.

Aurora Cannabis Inc. (NYSE: ACB) is another top pick at Jefferies, and the analysts still have a Buy rating on the stock. The price dropped from C$14 to C$7 (US$10.50 to US$5.25). The shares traded somewhat higher Friday morning at $3.80.

Canopy Growth Corp. (NYSE: CGC) was downgraded to Underperform from Hold. The price target dropped from a stunning C$77 to C$25 (US$57.75 to US$18.75) as well. Shares traded at $20.75 Friday morning.

Cronos Group Inc. (NASDAQ: CRON) was maintained at Underperform, and the price target dropped to C$10 from C$15 (US$11.25 to US$7.50). The stock is trading above that target level on Friday at $8.05.

Hexo Corp. (NASDAQ: HEXO) was raised to Hold from Underperform, but the price target was lowered from C$7.70 to C$3.80 (US$5.77 to US$2.85). The shares traded just below that level early Friday at $2.80.

Tilray Inc. (NASDAQ: TLRY) was reiterated with a Hold rating, but the price target went from C$57 to C$25 (US$42.75 to US$18.75). The shares have been on a roller-coaster ride over the past 12 months, trading as high as the $300 level in September of last year. On Friday morning, the stock is trading at the $21.20 level.

The marijuana industry is going through its own dot-com bubble burst, and just like the late 1990s and into the early 2000s, there will be companies that cease to exist and some that grow into titans of the industry. Just remember, both Amazon and Apple at one point traded in the single digits.

Those looking to invest in the industry need to have a very long-term horizon, as the volatility is probably here to stay. With that in mind, just like with the tobacco settlement, revenue starved states in the United States will continue to legalize marijuana for both medical and recreational use, and needless to say, the American market dwarfs Canada, and would indeed be the ultimate game changer.

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