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Stocks  | August 20, 2019

It’s no question that the marijuana industry is a budding space. The industry saw $10.9 billion in sales last year, not including sales that occurred illegally. Not to mention analysts predict this figure could jump by anywhere between $50 billion to $200 billion over the next ten years.

However, somewhere along the way things went awry for cannabis stocks. A few have actually seen growth slow with some being bogged down by supply-side issues and tax concerns in the U.S. That’s not to say that these stocks won’t see upside again, but investors will have to be patient and pay close attention to determine whether or not they can recover.

Analysts from Wall Street’s top firms highlight 3 beaten-down cannabis stocks to watch. Let's take a closer look:

Canopy Growth Corporation (CGC)

Many investors are wondering what happened to Canopy Growth. The prominent medical cannabis company has taken a beating in its last two quarters, with growth becoming stagnant.

In its most recent quarter, CGC reported disappointing Q1 results that didn’t just miss but rather failed to come close to consensus estimates. While the company posted quarterly net revenue of CA$90.5 million, up by more than 3x from the year-ago quarter, investors were not impressed as this result was well below the Street’s CA$109 million estimate.

More bad news came when CGC reported its net loss widened to CA$1.3 million from CA$91,000 in the prior-year quarter. Management attributes the loss to a drastic drop in cannabis oil and softgel sales, plunging to CA$0.2 million from CA$36.5 million in Q4.

While some have placed the blame on channel stuffing or filling distribution channels with more product than is needed, others have pointed to new competitors that have zeroed in on CGC’s market share.

CIBC analyst John Zamparo believes that the latter is the case with Canopy. “We believe the decline amounts to an unsustainable market share from the onset of adult-use legalization, with competitors now having improved their offering,” he explained. 

The analyst does note that its backing from Constellation Brands (STZ) as well as its 15 upcoming clinical trials and 270 patents lends itself to strong long-term growth prospects. “We believe investors will need to show patience to allow Canopy to build its international presence as clinical trials and patents take time to play out and eventually give Canopy Growth an advantage versus peers,” Zamparo added.

As a result, Zamparo reiterated his Outperform rating on CGC but did drop the price target from $80 to $50.

All in all, the rest of the Street is cautiously optimistic about CGC. With 9 Buy ratings vs 6 Holds received over the last three months, the consensus among analysts is that this cannabis stock is a ‘Moderate Buy’. Its $44 average price target suggests 57% upside potential.

Tilray Inc. (TLRY)

The second cannabis stock on our list, like CGC, didn’t exhibit the level of growth investors wanted to see.

While Tilray’s second quarter revenue gained year-over-year, its losses more than doubled from the year-ago quarter. The company has failed to generate a profit in the year since its IPO, with management warning investors that this won’t change anytime soon.

Investors are especially troubled by TLRY’s international sales. It trails behind its competitors in this segment of the business and has shown only small sequential improvement.

That being said, TLRY has made efforts to expand its reach in the Portugal market with the GMP certification of its facility in the country. TLRY is also expanding its access to the domestic market by opening more retail locations in key Canadian provinces, including Ontario. Additionally, the cannabis company stands to benefit from the launch of the Canadian cannabis derivatives market in October.  

Jefferies analyst Ryan Tomkins argues that while TLRY hasn’t quite achieved a turnaround yet, the company is taking steps in the right direction. “Continued recreational revenue increases and expected international medical sales pickup obvious positives, but still reasons for caution in our view,” the analyst explained.

The analyst adds on a positive note that management stated oversupply was not pressing as they once thought, and quality supply was scarce, which led to investments in expanding their own facilities. It was also able to launch a new broad spectrum CBD product under the Manitoba Harvest brand in the U.S.

As all of these factors have not quelled his concerns, Tomkins reiterated his Hold rating and $57 price target on TLRY stock.

All in all, the rest of the Street mirrors the analyst’s cautious sentiment, with TipRanks analytics showcasing TLRY as a Hold.

The Green Organic Dutchman Holdings (TGOD)

Lackluster second quarter results have put a dark cloud over this cannabis stock.

On August 13, TGOD reported that its sales for the quarter totaled CA$2.8 million, falling well below the CA$4.6 million consensus estimate. It didn’t help that its cash dropped from CA$214 million at the beginning of 2019 to CA$69 million in Q2.

That being said, one analyst believes that concerns regarding sales and cash flow have been blown out of proportion. Tomkins, who also covers TGOD, points out that its sales only include revenue generated from the HemPoland segment of its business. Once the company’s new Grower’s Circle launch extends beyond its pilot program, Tomkins thinks sales should get a boost.

“Any disappointment is misplaced, in our view. We see sales strongly picking up from here and with costs under control, we think the company is well placed to hit its target of turning a profit by the end of Q1 2020,” the Jefferies analyst added. As a result, Tomkins reiterated his Buy rating and CA$6.50 price target.

TGOD announced it had received a purchase order from Ontario as well as new supply and distribution agreements with the provincial boards Alberta Cannabis and BC Cannabis stores, which management hopes will bolster sales.

While these positive developments have led some to believe that the tide is turning for the marijuana stock, not all analysts are convinced TGOD has pulled off a turnaround.

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