Canadian cannabis stocks are expensive.
That’s a pronouncement that by now should surprise exactly nobody. It’s also probably the reason it has taken investment banker Stifel so long to take the plunge, and actually begin recommending stocks in this sector. Now that it has, you can hardly blame Stifel’s Andrew Carter for erring on the side of caution, and placing its bet on the lead horse in this race, to win the race in the end.
Currently, said “winning horse” goes by the name of Canopy Growth (CGC). Far and away the most popular pot stock with a market capitalization of more than $14.1 billion, Canopy Growth stock is clearly the favorite of marijuana investors today, and Andrew is no exception. Calling Canopy Growth “the best investable opportunity for capitalizing on the growth of the global cannabis category,” the analyst initiated coverage on Canopy Growth with a “buy” rating and a C$64 price target, which implies about 17% from current levels.
Why? Several reasons.
With $114 million in sales last year, Canopy Growth boasts “definitive Canadian leadership” over second-place Aurora Cannabis, and the rest of the pack is far behind. Canopy also possesses one of the best balance sheets in the business, with nearly $3 billion in cash, and a powerful partner in the form of Constellation Brands (which provided essentially all of that cash, and even a bit more, in exchange for a 40% stake in the company). And Carter sees Canopy Growth as having “multiple avenues for attacking the U.S. market,” the sine qua non for growing its sales to the extent necessary to justify Canopy’s $14 billion-plus market cap.
Indeed, it’s hard to overstate that last factor. As the analyst explains, “a path toward establishing a position in the U.S. is required at current valuation levels for the industry” [emphasis added]. Failing that, one has to imagine that Carter would withdraw his support even from Canopy Growth — and probably run away screaming from smaller players such as Aurora, Cronos, and Tilray. Nevertheless, in Carter’s view, Canopy Growth “is best positioned among its peers in this market” by virtue of its April agreement to acquire Acreage Holdings if and when the U.S. federal government legalizes the sale of marijuana nationwide.
Canopy’s relationship with Constellation Brands, and its large war chest of cash on hand, give the company the ability to “relentlessly invest … in clinical trials and R&D.” Such investment will open up the possibility for the company to secure even more partnerships — this time with “large pharmaceutical companies that have to consider a defensive posture for the disruptive potential.”
And this would not coincidentally provide even more cash, fund even more R&D, and so on and so forth.
Still, even more important for Canopy, says Carter, is gaining access to Acreage and its ability to grow marijuana at scale for the U.S. market. This will start “a virtuous cycle for the two entities whereby Acreage benefits from Canopy’s knowledge, product offering, and access to capital while Canopy will be the only LP with a definitive answer for the U.S.,” opines the analyst. Simply put, the cannabis industry may have gotten its first big break in Canada, but pot stocks still require the U.S. to play ball in order for them to become winning investments.
Canopy Growth included.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.