A Wall Street bank just started covering 7 marijuana stocks. Here's what it's saying.

Ian Willms/Getty ImagesCannabis users congregate at Trinity Bellwoods Park for a ‘smoke out’ on October 17, 2018 in Toronto, Canada. Canada became the second country in the world after Uruguay and the first G7 nation to legalise cannabis use on Wednesday.
  • Last year was a historic one for legal-marijuana proponents due to legalization in Canada and some US states.
  • Major marijuana producers such as Cronos Group, Canopy Growth, Tilray, and Aurora Cannabis were listed in the US last year.
  • Marijuana stocks are popular on Robinhood, a free-trading app popular among millennials.
  • On Monday, Jefferies became the second major Wall Street investment bank to write sell-side notes on popular weed companies.

A Wall Street bank has officially initiated coverage of cannabis stocks, as high-flying cannabis companies have caught the attention of both the Main Street and Wall Street following a wave of marijuana legalization.

Last year was a historic one for legal-marijuana proponents. Canada and the state of Michigan legalised the recreational use of marijuana, and the US Congress passed the Farm Bill, which legalised hemp, a key source of the ingredient cannabidiol.

Additionally, major marijuana producers such as Cronos Group, Canopy Growth,Tilray, and Aurora Cannabis were listed in the US last year, prompting investors, especially younger ones, to pour money into the industry. On Robinhood, a free-trading app popular among millennials, Aurora has outranked all other stocks including Apple in terms of the number of users who own shares.

As the demand for market insights into marijuana stocks grows, Jefferies analysts Owen Bennett and Ryan Tomkins have started to write sell-side notes on popular weed companies. Jefferies is the second major Wall Street investment bank to cover the industry, after Cowen.

Here’s a list of the cannabis stocks that Jefferies initiated coverage on, in ascending order by the differences between the bank’s price target and where shares were trading as of February 22:


Cronos Group

MI

Ticker: CRON

Rating: Underperform

Price target: 17 Canadian dollars

Potential downside: -41%

Jefferies comment:

“While historically a solid operator, at present we feel there is little to get really excited about other than the investment and large sum of money from Altria,” the analysts said.

“We also question when Altria value creation will begin to materialise, especially as there appears little near-term appetite to put the Altria money to work. Against this backdrop we think the market has gotten ahead of itself.”

Source: Jefferies


HEXO

MI

Ticker: HEXO

Rating: Buy

Price target: 5.60 Canadian dollars

Potential upside: -28%

Jefferies comment:

“We think the market has taken the Molson deal as something more indicative of a stronger business than it is,” the analysts said.

“Hexo has a robust medical base but seems ill prepared for solo success beyond that. For us, its stated targeted strategy of primarily being an ingredient provider for Fortune 500 reflects a lack of belief in going alone. If further deals don’t start coming in, or current ones bear fruit, the multiple is at risk.”

Source: Jefferies


Emerald Health Therapeutics

MI

Ticker: EMH

Rating: Hold

Price target: 4.30 Canadian dollars

Potential upside: +6%

Jefferies comment:

“We think Emerald is well set up to be a sizeable player in a couple of segments going forward, being medical drug formulations, and health and wellness in recreational,” Jefferies’ analysts said.

“Our caution near term is that these segments will take a while to develop and really start to contribute. At the same time, the majority of current capacity is via a JV, thereby further limiting the rate of profit growth.”

Source: Jefferies


Canopy Growth

MI

Ticker: CGC(in the US), WEED (in Canada)

Rating: Hold

Price target: 64 Canadian dollars

Potential upside: +9%

Jefferies comment:

“Along with Aurora, we view Canopy as best placed to dominate on a global basis in the years ahead. Despite this, we think its valuation has appropriately captured this strong positioning and, on a 12-month view, struggle to justify adding to positions at these levels,” Jefferies’ analysts said.

“Possible upside from US hemp CBD operations but this is unlikely to really contribute near term.”

Source: Jefferies


CannTrust

Courtesy of CannTrust

Ticker: CTST

Rating: Buy

Price target: 15 Canadian dollars

Potential upside: +19%

Jefferies comment:

“We think TRST is a very smart, consistent operator that has slipped under the radar, maybe a function of a non US listing,” Jefferies’ analysts said.

“It is one of the strongest medical businesses in Canada, has been performing very well in early rec, is positioned well to capitalise in derivatives, and has made some shrewd moves internationally. We expect its strength to become increasingly evident over the next 12 months which should drive upside.”

Source: Jefferies


Flowr

MI

Ticker: FLWR

Rating: Buy

Price target: 5.70 Canadian dollars

Potential upside: +24%

Jefferies comment:

“We think there are good odds Flowr will be a successful premium player over the long term, with all early indications that it is doing everything right to make that happen,” Jefferies said.

“As momentum continues to build throughout the year, and with a potential US listing, we expect to see further upside from here.”

Source: Jefferies


Aurora Cannabis

MI

Ticker: ACB

Rating: Buy

Price target: 12 Canadian dollars

Potential upside: +31%

Jefferies comment:

“We believe Aurora, along with Canopy, is best placed to dominate globally in the years ahead, yet the story is less appreciated,” Jefferies said.

With infrastructure in place to strongly accelerate near-term Canadian sales as derivative products come on line, and US optionality to become more visible, we see further upside on a 12-month view. Shareholder dilution has been a risk in the past but we’d like to think this will now be more limited.”

Source: Jefferies


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