Marijuana | Sector Focus

5 Marijuana Stocks to Buy — and 2 to Avoid, According to an Analyst

Five cannabis stocks got a thumbs-up from Jefferies, as the firm started coverage of Canadian marijuana producers.

Photograph by Robyn Beck/AFP/Getty Images

Five cannabis stocks got a thumbs-up from Jefferies on Feb. 25, as the firm started coverage of Canadian marijuana producers. But analyst Owen Bennett rated industry leader Canopy Growth Holdings as a Hold, while slapping Cronos Group with an Underperform.

Among his Buy rated stocks, Bennett said the big grower Aurora Cannabis (tickers: ACB or ACB.Canada) has 25% upside to his target price of C$12 (US$9.11). His other picks were the smaller producers Green Organic Dutchman (TGOD.Canada), CannTrust Holdings (TRST.Canada), OrganiGram...

Five cannabis stocks got a thumbs-up from Jefferies on Feb. 25, as the firm started coverage of Canadian marijuana producers. But analyst Owen Bennett rated industry leader Canopy Growth Holdings as a Hold, while slapping Cronos Group with an Underperform.

Among his Buy rated stocks, Bennett said the big grower Aurora Cannabis (tickers: ACB or ACB.Canada) has 25% upside to his target price of C$12 (US$9.11). His other picks were the smaller producers Green Organic Dutchman (TGOD.Canada), CannTrust Holdings (TRST.Canada), OrganiGram Holdings (OGI.Canada) and Flowr (FLWR.Canada), which he saw having upside of 20%-40%.

The world market for legal weed will reach US$30 billion by 2022, Bennett said, and $50 billion by 2029.

In his 250-page industry piece, the Jefferies analyst argued that investors shouldn’t worry that “weed is just another agricultural commodity” whose price will drop from oversupply. Premium pot won’t become commoditized, Bennett said, and he said he doesn’t see a cannabis glut occurring until mid-2021 at the earliest.

“[I]f you can deliver a top quality experience,” he wrote, “you will be able to charge a premium.”

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While his report looked only at companies that sell weed in countries where it is nationally legal, like Canada, Bennett noted that any cannabis company that aspires to large-cap status will need to have a strong position in the U.S., which is the world’s biggest cannabis market. Sales of the recently legalized hemp, a source of the non-psychoactive ingredient cannabidiol—or CBD—will help lift the U.S. sales opportunity above US$32 billion in 2022. All the companies he covers, Bennet said, “should still be establishing optionality for when/if U.S. regulations change.”

Bennett said he believes that Canopy is well-placed to dominate the world cannabis market along with his Buy-rated Aurora. But he said that the company’s US$15 billion valuation (on a price of US$43.36 the day of Bennett’s report) captured its strong position and led him to a Hold rating. His other Hold was Emerald Health Therapeutics (EMH.Canada), a small vendor of medical cannabis that relies on partnerships for its supply.

Cronos Group (CRON) grabbed headlines when tobacco giant Altria Group took a $1.8 billion stake in the Canadian pot producer. But at US$20.60 on the day of the report, Cronos stock looked expensive to the analyst, especially when he compared its modest expected production capacity to the likes of Aurora. So he rated Cronos an Underperform. His other Underperform rating was for Hexo (HEXO.Canada), a midsize producer whose stock is floating on overoptimistic forecasts for its cash flow, Bennett said, and the glow of Hexo’s deal to collaborate with Molson Coors Brewing (TAP).

One of the best-known cannabis names was absent from Bennett’s new coverage, namely Tilray

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(TLRY). But in the Jefferies report’s valuation exercises, Tilray stands out as an expensive stock.

Bennett’s report acknowledged that it’s hard to know how to value cannabis stocks, with little reliable financial data, to date. As Canada progresses through the first year of sales after its October 2018 legalization of adult recreational sales, valuations will increasingly be driven by financial performance and delivery, the analyst said, and true strengths and weaknesses should become visible.

“We would also hope that this leads to less volatility in the space,” he concluded.

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This article was originally published on Feb. 25, 2019.

Write to Bill Alpert at william.alpert@barrons.com

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