It’s been a rough few months for cannabis stocks. Apparently, it’s not easy to make money in the weed business. Key players recently released bleak forecasts for the sector, and most experts maintain a bearish outlook on weed stocks. However, it wasn’t too long ago that these companies were Wall Street rock stars. Can they recapture their former glory? If so, now might be a great time to pick up some shares.
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Hexo Corp. (NYSE: HEXO)
This stock was a darkhorse favorite when it first hit the market, but it’s been a bad month for Hexo shareholders. Their shares lost over a third of their value in October. The massacre started when CFO Mike Monahan resigned only 4 months after he took the job, possibly indicating that bad news was coming down the pipeline. Those indications proved correct, Hexo slashed its revenue forecast and pulled its 2020 outlook entirely, citing “lower than expected product sell through” for the quarter.
Hexo reports earnings on October 24 and angry shareholders will surely be looking for answers. On the bright side, the bar has been set so low that there is a chance of a modest upside pop if Hexo announces something even somewhat positive.
Many cannabis companies are reporting that the black market is more resilient than experts anticipating, with over 40% of Canadian users purchasing cannabis from illegal sources. These companies are struggling to match the black market’s low prices. However, Hexo has a plan. It recently announced the release of a new budget brand of cannabis that will retail for prices much closer to black market levels. Hexo’s value brand, Original Stash, will retail for $4.49 a gram, including taxes.
Shares recaptured some losses after crashing on October 10th, but they are still down significantly from where they opened the month.
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Aphria (NYSE: APHA)
Last week, Aphria delivered earnings for the first quarter of its fiscal year 2020 and reported a surprise profit during the period. Experts were anticipating the company would lose CA$0.02 per share, instead, it posted a gain of CA$0.06 per share. Aphria is one of the few cannabis companies to post quarterly profits.
The earnings call was a big success. The company reiterated its 2020 guidance and impressed investors with its strong balance sheet. Aphria pro forma statements reported free cash of $500 million, equipping the company with plenty of ammunition to fund future growth and cover liabilities. Share prices jumped over 25% after the report hit the newswires.
Aphria’s report was in stark contrast to Hexo’s. Management was optimistic and upbeat. However, Hexo’s dark outlook is still dragging on the market. Aphria quickly surrendered over 13% of its post-earnings gains and is now down about 23% over the past 30 days. Some experts weren’t impressed by Aphria’s quarterly profit and said it was mainly driven by one-time gains resulting from the company’s reshuffling of its investments and gains in its stock price.
After the Hexo report, Seaport downgraded most of the Canadian cannabis stocks, except for Aphria. The firm maintained its ‘buy’ rating on the Aphria, but now it stands alone as the only Canadian cannabis stock with a positive rating from Seaport.
Cronos Group (NASDAQ: CRON)
Stifel’s Andrew Carter paid homage to ‘Game of Thrones’ in a recent report that named Cronos Group as the new “King in The North“. He thinks CRON is in a better position than the rest of the sector, citing better valuations and greater growth potential in the U.S.
Carter wrote, “We believe Cronos will showcase an enhanced revenue growth profile leveraging the distribution capabilities of Altria to build its U.S. CBD business and demonstrate breakthrough product potential in the Canadian vapor segment.”
Vaping is a focal point for Cronos’s growth strategy, but the recent vape crisis in the U.S. is making investors nervous. Carter addressed those concerns in his note: “Delays or draconian regulation around vapor suggest some risk to our outlook for the acceleration Cronos’ sales growth, but we view the issue as a resolvable controversy favoring a strictly regulated system providing Cronos an avenue for differentiating its growth profile.”
Cronos stock fluctuated wildly last week, but any short-term gains quickly succumbed to sector-wide bearish sentiments that have made it hard for any pot stocks to get a foothold. In the long term, Cronos could be one of the best Canadian cannabis stocks on the market.
American Weed Stocks: The Next Growth Market?
Growth is clearly subsiding in Canadian pot stocks, and one expert thinks U.S. weed stocks will lead the way forward. Analysts from Seaport Global discussed the sector in a recent report and advised investors to start shifting towards U.S. cannabis companies.
“As for the U.S. multistate operator group, we see a completely different set of circumstances in place [from Canada], and we would broadly recommend that investors rotate away from Canada and toward the U.S. … We see a number of opportunities for public MSOs (Multi-State Operator) on the horizon.”
The U.S. is nowhere near federal cannabis legalization, but these companies are making money at the state level. American lawmakers recently loosened banking regulations that previously prevented cannabis companies from accessing capital markets, indicating that sentiment towards cannabis is shifting in Washington.
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