Consumer Products

BofA Analysts Say These Are the 2 Weed Stocks to Buy

It would be fair to say that cannabis stocks received three positive indicators over the past six months. First is the election of Joe Biden and Democratic party control of both Houses of Congress. Second is the announced merger in December of two heavyweight Canadian marijuana producers. And third is some attention from retail Reddit investors.

On Wednesday, BofA Securities resumed coverage on four Canada-based licensed marijuana producers: Aurora Cannabis Inc. (NASDAQ: ACB), Canopy Growth Corp. (NASDAQ: CGC), Cronos Group Inc. (NASDAQ: CRON) and Tilray Inc. (NASDAQ: TLRY).

BofA’s overall view of cannabis stocks puts heavy emphasis on the “pace and scope of global cannabis legalization, especially in the US. … Longterm, the best performing cannabis stocks will be those that can grow profitably globally, including the US.”

Immediately after the November election, enterprise value-to-estimated 2022 sales (EV/FY2) “expanded 16 multiple turns,” which BofA attributed to “investor enthusiasm around the US election.” That number has now dwindled to five turns above the November level. BofA explains the decline: “[w]e think investors have realized US legalization will take longer than hoped.” The analysts say they expect U.S. federal legalization by 2025, coinciding with the end of President Biden’s current term of office:

We think the US will legalize at the federal level during Biden’s 2021-25 term, providing Canadian [licensed producers] an opportunity to compete in a $17bn (2020) and growing market. A swell of state-level legalizations and a Democrat-led US bodes positively for legalization, but we think the process will be multi-year and made in incremental steps (more states legalizing, banking reform, enforcement changes). We expect social justice reform tied to cannabis legislation to be an area of contention even within the Democratic party.

For 2021, BofA notes five important themes: 1) weak first-half sales due to the continuing coronavirus pandemic; 2) faster opening of retail stores in Ontario, Canada’s most populous province; 3) tight inventory at the companies in BofA’s coverage; 4) expected good margins on premium products; 5) improved sales of Cannabis 2.0 products that command higher prices and deliver better margins.

Here are BofA’s ratings and price targets for the four companies on which the analysts resumed coverage:

  • Tilray: Buy with a price target of US$23, compared with a recent price of US$17.72
  • Canopy Growth: Buy with a price target of C$45, compared with a recent price of C$33.33
  • Aurora Cannabis: Neutral with a price target of C$12, compared with a recent price of C$10.62
  • Cronos: Underperform with a price target of US$7.50, compared with a recent price of US$8.21