Marijuana stocks are mixed with Canopy Growth and Hexo in focus

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February 19, 2019 12:17pm NYSE:MJ

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From Ciara Linnane: Cannabis stocks were mixed on Tuesday, amid a flurry of announcements on the progress of medical and recreational-use bills around the U.S.

Pennsylvania’s medical cannabis businesses made at least 600,000 transactions in its first year, allowing 83,000 patients access to the substance, Gov. Tom Wolf announced over the weekend. Sales totaled more than $132 million with the commonwealth collecting more than $2 million in tax revenue to date.

“Our goal for the next year and beyond is to increase the number of grower/processors and dispensaries operating, to register even more physicians and to continue the growth of our scientific, medically based program,” Department of Health Secretary Dr. Rachel Levine said in a statement.

For now, the medial cannabis program has given permits to 25 grower/processors and 50 dispensaries across Pennsylvania.

New Jersey has moved closer to legalizing weed for recreational use with Gov. Phil Murphy and state legislative leaders reaching a deal in principle on how to tax and regulate the market, according to, a marketing agency and local news provider. The website said the proposed bill would tax cannabis by the ounce, rather than imposing a flat sales tax that state Senate President Stephen Sweeney opposed.

Lawmakers have been unable to agree a framework for a legal market, amid concerns that falling weed prices would shrink the amount of tax revenue the state could collect a problem encountered in other states that have legalized. They were also at odds over regulation, with the new bill proposing the creation of an independent commission. The bill would also allow for past convictions for cannabis possession to be expunged. The bill must be passed by both houses of the Democratic-led state legislatures before it can be signed into law.

Among individual stocks, Canopy Growth Corp. shares CGC, -2.92%WEED, -2.79%  fell 2.8% in morning trade. Benchmark said the company’s fiscal third-quarter earnings released late last week showed the company benefiting from the initial shipments into Canada’s legal adult-use market.

“We anticipate continued sales growth as the firm benefits from adult use and international medical cannabis sales, offset somewhat by slower Canadian medical cannabis sales as some consumers switch from medical to adult use,” analyst Mike Hickey wrote in a note. “We expect future product offerings, including edibles and beverages, to accelerate growth in fiscal 2020 and beyond.”

Hickey rates the stock a buy with a C$100 ($75) price target, equal to about 38% above its current trading level.

Elsewhere in the sector, U.S. listed shares of Quebec-based Hexo Corp.HEXO, +0.18% HEXO, -0.14%   were flat, after Oppenheimer initiated coverage with an outperform rating and 12 to 18-month stock price target of $7.00, or about 18% above its current trading level.

“We overall look favorably upon the early efforts by the HEXO management team in developing a foundation to become a leading global CPG (consumer packaged goods) player within the cannabis category,” analysts led by Rupesh Parikh wrote in a note.

The analyst cited Hexo’s success in establishing Canadian infrastructure, in joining with leading CPG player Molson Coors Brewing Inc. TAP, -0.03%  and in its early innovations.

“We view the Molson Coors partnership as a significant positive development for the company and a vote of confidence on the company’s ability to execute,” Parikh wrote. “We are closely watching the company’s ability to land partnerships in other categories such as cosmetics, edibles, vapes, etc.”

Hexo shares are trading at a discount to larger peers, many of which continue to enjoy elevated valuations bolstered by M&A, strategic investments and scarcity value. However, Oppenheimer noted given the immature state of the industry, its rating should be viewed as more speculative than ratings for other CPG companies.

Aurora Cannabis Inc. ACB, -0.87% ACB, -0.75%  shares were down 0.7%. That company reported its latest quarterly sales last week, nearly quadrupling revenue but also showing large losses and a shrinking margin.

Tilray Inc. shares TLRY, -0.27%  were flat, and Cronos Group Inc. CRON, +1.01%CRON, +1.46%  shares were up 2.5%. Aleafia Health Inc. was up 1.7%.

The ETFMG Alternative Harvest ETF MJ, -0.49%  was up down 0.4%, and the Horizons Marijuana Life Sciences ETF HMMJ, +0.05%  was up 0.5%. The S&P 500SPX, +0.24%  and the Dow Jones Industrial Average DJIA, +0.15%  were flat to slightly lower.

The United States Natural Gas Fund L.P. (UNG) was trading at $23.54 per share on Tuesday afternoon, up $0.15 (+0.64%). Year-to-date, UNG has gained 0.94%, versus a 4.57% rise in the benchmark S&P 500 index during the same period.

UNG currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #52 of 108 ETFs in the Commodity ETFs category.

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