- Wall Street is warning against Canadian cannabis stocks.
- In a Monday morning note, Cowen analyst Vivien Azer downgraded a group of major Canadian cannabis companies after a few disappointing quarters.
- Azer and other analysts still picked Canopy Growth as the industry leader in Canada, though they said Canadian companies are lagging behind their US cannabis counterparts. Her top pick in the US: Green Thumb Industries.
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Wall Street just leveled a stark warning against investing in Canadian cannabis stocks and said investors should shift their attention to emerging US names, instead.
In a Monday morning note, Cowen analyst Vivien Azer — one of the first analysts at a US investment bank to cover the sector — downgraded a basket of major Canadian cannabis companies (LPs), including the embattled Aurora Cannabis, Tilray, and Sundial.
That leaves Canopy Growth, under the guidance of its new CEO, David Klein, as Azer’s top Canadian cannabis pick, and the only Canadian company she maintains her outperform rating on. Azer listed Cronos Group as market perform, though she said the Altria-backed company has fallen down to second on her pecking order.
“While industry challenges around doors and high quality flower supply are well understood, we now believe that the slower than expected rollout of cannabis 2.0 products will also prove as a headwind to revenues,” Azer wrote in the note.
Aurora Cannabis slipped 6.6% in trading on Monday and Tilray lost 10%, while Sundial climbed 5.2%.
With Canada’s so-called “cannabis 2.0” products on the horizon — vapes, edibles, beverages, and other derivative THC and CBD-containing products — the hope was that these sales would provide a much-needed boost to the industry, but that hasn’t yet materialized, in part because the rollout has been delayed.
The Canadian cannabis sector has been hit with a litany of bad press in recent months, including slumping share prices, executive shake-ups, repriced deals, corporate governance scandals, and wave after wave of layoffs amid an industry-wide capital crunch.
Most analysts, Azer included, point to the delayed rollout of retail stores and supply chain issues in Canada as the chief reason for a few quarters of less-than-stellar returns, as well as the hangover from a spate of illnesses linked to THC-containing vapes in the US.
Azer revised her forecast for the Canadian cannabis market down by 32%, to $3.5 billion, given the slow rollout of cannabis stores and a lack of inventory.
Going long on US cannabis names
“More broadly, we prefer U.S. cannabis names to its Canadian peers, and reiterate GTI [Green Thumb Industries] as our preferred name in U.S. cannabis,” Azer wrote.
Azer isn’t the only analyst to sour on Canadian cannabis.
In a note from earlier in February, Purpose Investments analysts Greg Taylor and Nawan Butt write that “we are witnessing a fight for survival in Canada.”
“[A]nd we can stem this back to the fact that too much capital was applied too quickly without paying attention to the most important factor in retail-oriented operations: the consumer,” the analysts wrote.
Like Azer, Purpose Investments’ analysts say they expect Canadian LPs to “hit the reset button” over the next few quarters with new executive teams and revamped plans to dominate a crowded market.
“Momentum might just be exponential south of the border,” they wrote. “Although it feels a bit aggressive to say that we haven’t even witnessed the inflection point yet, US multi-state operators (MSOs) have an incredible amount of room to grow.”
To that end, the analysts say that they are long on US cannabis companies with large footprints that have been able access financing — like Cresco Labs and Acreage Holdings — and that it’s best to “stay away” from Canadian cannabis companies for the next 2-3 quarters.
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