Since the middle of last year, marijuana stocks have taken a major beating. The best performing of the Canadian cultivation and retail stocks is down by more than a quarter, and the worst is down more than 85%.
Is it even possible for these companies to make a comeback anytime soon, or is it possible that the stocks are stuck at lows that will take a lot longer to recover from?
The industry’s ills have been well documented by now. Canadian federal and provincial governments moved slowly and regulating the new cannabis industry took longer than expected. Legal sales of recreational pot in Canada did not begin until the fall of 2018, even though legislation approving sales was passed almost 18 months earlier.
Excise and other taxes are high and leave the country’s legal growers competing against black-market suppliers who pay no taxes or licensing fees. Canada also restricts cannabis companies’ ability to build their own brands.
In Ontario, Canada’s most populated province, only about two dozen retail stores were open a full year after sales began. As of early May, only about 60 stores had been authorized. Buying adult-use cannabis from a black market supplier is not only cheaper but easier.
Health Canada also failed to move quickly to license derivative products (known as Cannabis 2.0) like edibles, vapes, infused beverages, topicals, tinctures and concentrates. Sales of derivatives were expected to boost revenues and profits and to keep investors buying stock in Canada’s cannabis companies. That hadn’t happened by the end of the first quarter of this year.
What do five of Canada’s leading cannabis producers have to do to turn their (and their investors’) fortunes around? Our review also includes a U.K.-based pharmaceutical firm that developed and now sells an approved treatment for seizures. Analysts have brighter outlooks on three of these companies, while the others appear to be just holding on.
GW Pharmaceuticals PLC (NASDAQ: GWPH) is a London-based pharmaceutical maker that makes Epidiolex, a cannabis extract used to treat childhood epilepsies and some other conditions. The firm is now working on a cannabinoid-based treatment for autism spectrum disorder.
In late June, Zynerba Pharmaceuticals Inc. (NASDAQ: ZYNE) reported positive top-line results on a trial of its cannabinoid-based Zygel transdermal treatment for children and adolescents with autism spectrum disorder. The results were mixed and the company’s stock dropped by nearly 50%. GW Pharma’s risks are certainly no less.
Over the past 12 months, GW Pharma’s stock has dropped by 26%, the least of any stock in this group. In its most recent quarter, the company’s operating loss was $623 million and cash flow from operations was a negative $549 million. Shares closed at $128.11 on Thursday, in a 52-week range of $67.98 to $175.35 and with a 12-month price target of $190.56. That implies a potential upside of 48.7%.
Hexo Corp. (NYSE: HEXO) grows and markets cannabis in Canada. The company also offers other adult-use and medical products. On Thursday, the company announced an agreement to sell medical-use cannabis in Israel, Hexo’s first deal with a foreign buyer. The announcement pushed shares up by 18% on the day.
Hexo stock closed at $0.74 on Thursday, in a 52-week range of $0.35 to $5.15. The Toronto price target on the stock is C$1.46 ($1.08), implying a potential upside of 45.9%.
Aphria Corp. (NASDAQ: APHA) cultivates and distributes medical cannabis in Canada and other countries around the world. In 2019, Aphria acquired Germany-based medical marijuana distributor CCPharma, and the German company’s revenues have received a significant boost since the coronavirus outbreak. Aphria also dominates Canada’s market for vaping products with a share in excess of 75%.
The company’s stock closed at $4.19 on Thursday, in a 52-week range of $1.95 to $7.60. The price target in Toronto is C$8.19 ($6.03), which implies a potential upside of 43.9%.
Canopy Growth Corp. (NYSE: CGC) grows and sells medical and recreational cannabis products in the United States, Canada, Germany and the United Kingdom. In the summer of 2018, alcoholic beverage maker Constellation Brands Inc. (NYSE: STZ) invested $4 billion in Canopy and took a $197 impairment on the investment when Constellation reported first-quarter results, but it continues to believe that cannabis-laced beverages will drive sales going forward.
In the past year, Canopy stock has lost nearly 60% of its value, closing on Thursday at $16.02, in a 52-week range of $9.00 to $36.74. The Toronto price target on the stock is about C$22.94 ($16.88).
Cronos Group Inc. (NASDAQ: CRON) cultivates and sells cannabis along with a variety of hemp-derived supplements and cosmetics. U.S. tobacco giant Altria Group Inc. (NYSE: MO) pumped $1.8 billion in Cronos in December of 2018 for a 45% stake. Altria’s investment has been shaved by a third since then. Cronos also had to restate financial results for the first three quarters of last year after reviewing some of the company’s transactions.
Over the past 12 months, Cronos stock has dropped by about 60%, and shares closed Thursday at $6.02, in a 52-week range of $4.00 to $15.69. The Toronto price target is C$6.32 ($4.65).
Aurora Cannabis Inc. (NYSE: ACB) produces medical marijuana and a variety of Cannabis 2.0 products. The company’s March quarter earnings report was much better than expected and pushed shares up more than 50% from a 12-month low. Enthusiasm for the stock has cooled, however, now that it has shed its stake in Canadian pot retailer Alcanna and slashed expenses with large cuts to staff and the closing of several growing facilities.
Since last July, Aurora stock has tumbled by 85%. Shares closed Thursday at $11.77, in a 52-week range of $5.30 to $89.52. The price target in Toronto is C$16.23 ($11.95).