It’s Time to Buy Cannabis Stocks, Says 1 Wall Street Firm

At this time last year, marijuana was considered to be the hottest investment trend on Wall Street. That’s because it was projected to be one of the fastest growing industries over the next decade. Although estimates on Wall Street vary wildly, the expectation is that legal weed sales would grow to between $50 billion and $200 billion annually in roughly a decade’s time.

Unfortunately, things haven’t gone as planned…

and over the past seven months, we’ve witnessed marijuana stocks go up in smoke. The Horizons Marijuana Life Sciences ETF, which contains more than five dozen cannabis stocks of various weightings, has shed 50% of its value since the end of the first quarter, with a number of very prominent pot stocks performing even worse.

To our north, Canada has been hampered by regulatory and procedural issues. Health Canada has been unable to keep up with a backlog of cultivation and sales licensing applications, while certain provinces have only approved a handful of retail store licenses. Meanwhile, in the U.S., high tax rates have encouraged the illicit market and made it very difficult for the legal cannabis to compete against the black market on price.

But things may be about to change, at least according to 74-year-old Wall Street firm Cantor Fitzgerald.

Marijuana stocks have found a bottom, and these two pot stocks are buys

On Tuesday, Cantor’s covering analyst, Pablo Zuanic, published a note on the industry and initiated coverage on six cannabis stocks. In that note, Zuanic emphasized that marijuana stocks were now at two-year lows, which seemed attractive based on their long-term opportunity. In particular, Cantor Fitzgerald sees value in Canadian marijuana stocks, especially with the coming launch of derivatives in mid-December. Zuanic also highlights the continuing acceleration of recreational sales, and ongoing dispensary openings, as catalysts for higher valuations.

Which stocks should you buy? According to Zuanic, OrganiGram Holdings (NASDAQ:OGI) and Aphria (NYSE:APHA) were the two to receive an overweight rating.

New Brunswick-based OrganiGram was initiated with an overweight rating and a price target of 17 Canadian dollars. That represents upside of — get this — almost 300% from the prior day’s closing price. OrganiGram is certainly poised to benefit from the launch of derivatives, with the company spending CA$15 million on a line of fully automated equipment capable of producing 4 million kilos of infused chocolates per year. OrganiGram also developed a proprietary nano-emulsification technology that expedites the onset of cannabinoids and can be added to beverages.

Furthermore, OrganiGram is the first licensed producer to have generated a no-nonsense operating profit. If you strip out fair-value adjustments and a host of other derivative liability revaluations, no other producers have been able to turn a genuine quarterly operating profit, save for OrganiGram.

As for Aphria, Zuanic and his team placed a CA$10.40 price target on its stock. This implies about 55% upside from the prior day’s closing price. In particular, Cantor Fitzgerald favors Aphria’s discount to its peers, even when adjusting for the company’s German distribution business, which is a low-margin operation. Zuanic is also confident in management, which has forecast CA$1 billion in revenue for fiscal 2020.

Wait and see with these three big names

If OrganiGram and Aphria are buys, what about the most popular pot stocks in the world: Canopy Growth (NYSE:CGC)Aurora Cannabis (NYSE:ACB), and Tilray (NASDAQ:TLRY)? According to Cantor Fitzgerald, all three have question marks that have them rated as “neutral” for the time being.

Canopy Growth, the largest marijuana stock in the world, by market cap, had its price target set at CA$27 by Zuanic and his team. This represents just 2% upside from the previous day’s close. The issue with Canopy Growth is that it has the industry’s worst margins, and hasn’t done a very good job of monetizing its impressive medical intellectual property portfolio, especially in Canada, per Zuanic. I’d also add that Canopy Growth is without a permanent CEO at the moment, and has seen its goodwill swell to more than 22% of total assets. In short, I wholeheartedly agree with Cantor Fitzgerald’s assessment to watch and wait on Canopy Growth.

As for Aurora Cannabis, it was tagged with a price target of CA$5.10, representing about 8% upside from where it closed on Monday. Interestingly, Zuanic expects Aurora to rally in the months that lie ahead, but sees more opportunity in other Canadian pot stocks. Remember, Aurora Cannabis has close to CA$3.2 billion in goodwill on its balance sheet after an aggressive acquisition spree. This represents 58% of its total assets and makes it very likely that a writedown is in its future. Caution certainly seems merited.

Lastly, Tilray was given a $20 price target (that’s U.S.), implying downside of 10%. Similar to Aurora, Zuanic believes Tilray could rally in the months to come, but foresees more attractive pot stocks to buy. Tilray’s biggest issue just might be that it lacks a clear-cut strategy. After CEO Brendan Kennedy announced plans in March to de-emphasize Canada in favor of European and U.S. investment, it’s become unclear what the next steps will be for Tilray in managing its expenses and pushing toward…

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