Forget Canopy Growth: Why 1 Top Analyst Likes Aphria and Aurora Cannabis Instead

What started off as a great year for major Canadian marijuana stocks has turned into a dumpster fire. The stocks of all five of the biggest players in the Canadian cannabis industry are down by double-digit percentages year to date, with four of the five plunging 25% or more.

Analysts have taken to cutting price targets and downgrading quite a few of the top pot stocks. Jefferies analyst Owen Bennett, for example, slashed his price target for Canopy Growth (NYSE:CGC) by two-thirds and downgraded the stock to an underperform rating from hold. But while he’s bearish about Canopy, this top analyst still likes two of the big five: Aphria (NYSE:APHA) and Aurora Cannabis (NYSE:ACB)…

Down on Canopy Growth

Canopy Growth remains the biggest Canadian cannabis producer by market cap even though its stock has dropped more than 60% from the highs set earlier this year. But Owen Bennett would take issue with anyone who thinks that Canopy’s valuation is attractive now.

It’s not surprising that Bennett would bring up Canopy’s massive losses and weak gross margins as a reason for his negative outlook. Canopy’s latest quarterly results were downright ugly. The company posted its biggest loss ever. Its gross margin of 15% fell from the previous quarter and was well below expectations. Even worse, Canopy’s net revenue slipped quarter over quarter.

The most concerning component of Bennett’s dim view on Canopy’s prospects, though, is his skepticism about the company’s strategy to launch cannabis-infused beverages. Since alcoholic beverage maker Constellation Brands first teamed up with Canopy in 2017, the company has played up its goal to roll out a broad lineup of cannabis beverages when the regulations were in place for such products.

There are significant questions as to whether or not consumers will actually want cannabis-infused beverages. If they don’t, Canopy’s decision to focus heavily on these products could backfire spectacularly. However, Canopy Growth CEO Mark Zekulin stated in the company’s Q1 conference call in August that Canopy thinks that its zero- and low-calorie drinks “will appeal not only to the current cannabis consumers but also expand the cannabis consumer category to reach a larger portion of the population.”

High on Aphria and Aurora

On the other hand, Owen Bennett really likes Aphria and Aurora Cannabis. He thinks that Aphria’s valuation is “very compelling” and views Aurora as one of the most likely winners in the global cannabis market over the long term.

While most of its peers have disappointed with their quarterly results, Aphria turned in a surprisingly strong performance in August. The company’s revenue skyrocketed and it delivered a solid profit, fueled primarily by its acquisition earlier this year of German medical cannabis distributor CC Pharma.

Aphria’s valuation does look attractive compared to the other top Canadian cannabis producers, especially given its hefty production capacity and international operations. Bennett also thinks that Aphria’s management team is executing well under the leadership of chairman and interim CEO Irwin Simon.

As for Aurora, Bennett is optimistic about the company’s prospects to achieve positive earnings before interest, taxes, depreciation, and amortization (EBITDA) by the second half of this fiscal year. He also thinks that should Aurora be successful in finding a big partner, it could be a significant catalyst for the stock…

Continue reading at THE MOTLEY FOOL

You May Also Like

About the Author: admin

Leave a Reply

Your email address will not be published.