When Constellation Brands (STZ) announced its multibillion dollar investment in Canopy Growth (CGC) in 2018, analysts were sure this was a sign of support for the company. A year later, it seems the bloom is off the rose and analysts are trimming their target prices if not also their ratings as the sector sells off.
The bear market for the cannabis sector began in March and hasn't shown any signs of letting up. In early September it seemed as if the bottom had been hit as stocks started to recover, but then the vaping crisis bled into the cannabis group and the selling renewed. This week's passage of the SAFE Banking Act by the U.S. House of Representatives gave stocks a lift, but it didn't last long as selling resumed.
Canopy Growth Cuts
The latest to throw water on the cannabis party is analyst Garrett Nelson of CFRA Research Company. He initiated coverage of Canopy Growth this week with a "Hold" rating and a C$35 ($26) price target. He has concerns over market saturation and cannabis pricing. "We also think the company remains far from turning the corner to profitability, noting that its losses have widened significantly in recent quarters and cannabis pricing has deteriorated meaningfully," wrote Nelson.
Exhibit one was the adjusted loss reported in the most recent quarter of $0.54 versus last year's $0.23. The stock was recently trading at roughly $24 (C$31), giving Nelson some room to hit the target. Nelson actually ran more numbers and came up with a net present value of C$58 ($43) a share. He likes the company's Acreage purchase rights, its market-share opportunities. What he remains concerned about is the potential for inventory overhang. However, he isn't the only analyst low balling the price.
In August, several analysts got out their scissors and cut price targets for Canopy Growth. Stifel analyst Andrew Carter lowered his target to C$44 from C$50 while keeping his "buy" rating. GMP Securities analyst Ryan Macdonell dropped his price target to C$45 from C$65 and kept his "buy" rating. Desjardins analyst John Chu has a "hold" rating, but cut his price target to C$46 from C$59. Piper Jaffray trimmed their price target to $49 from $54, but kept the "overweight" rating. According to TipRanks, the average price target for Canopy Growth is now $39.
Analysts are also trimming their ratings. A month ago, there were 14 analysts at a "Buy" according to the Wall Street Journal. That number has dropped to 12. Long-time cannabis analyst at Cowen & Co., Vivien Azer also cut her price target on several cannabis companies earlier this month. She is maintaining her "Outperform" rating on Canopy Growth, but in August she too slashed her price target to C$48 from C$82.
"At current levels, we think valuation for the group remains compelling," she wrote. Azer says she is still optimistic about the group, especially in Canada. She cites strong, underlying demand, improving supply levels, increasing numbers of stores and vapes and beverages coming to market soon. Even though the CannTrust (CTST) scandal has left a stain on the group, Azer sees the silver lining in the cloud. The positive aspect of losing CannTrust is that other companies will be able to grab that market share.
So what is the green swan that will bring buyers back to cannabis companies? It isn't likely to happen in 2019, unless the Senate manages to pass its own banking bill, which would jumpstart the sector. The Senate hasn't decided whether to craft its own bill or work off of what the House passed. Plus, it could be busy with impeachment proceedings and the majority leader Senator Mitch McConnell is against legalization.
Canada won't begin selling vapes and edibles until December, so sales figures won't really hit company's top lines until the first quarter of 2020. In the U.S., Michigan will begin accepting applications for recreational cannabis sales in November and sales will begin in 2020. Illinois will begin adult use cannabis sales on January 1, 2020. So, there is a lot happening at the end of the year to set the stage for a strong start to 2020. Buyers may want to hold their noses and jump in now. Once those photos of people lining up at dispensaries in 2020 hit the news, stocks will begin to take off once again.