Why Canopy Growth, Aurora Cannabis, and Hexo Stocks Are Still Flying High

What happened

Marijuana investors are having a good trip this week.

Yesterday, a report of “record revenues” from Canadian cannabis company Canopy Growth (NASDAQ:CGC) and a promise of profits to come lit a fire under the entire marijuana industry. Flying high alongside Canopy, peer pot producers Hexo (NYSE:HEXO) and Aurora Cannabis (NYSE:ACB) also enjoyed the rush.

And they don’t seem to want to come down. In noonday trading, shares of Canopy are still moving higher — up 2.6% — with Hexo up 3.6% and Aurora up 9.7%.

Stock chart going up with marijuana leaves growing out of each peak

Image source: Getty Images.

So what

A quartet of optimistic analysts are making happy noises to keep the rally going.

As TheFly.com reports today, investment bank CIBC has doubled its price target on Canopy Growth stock to CA$64 ($50.56). Cantor Fitzgerald is seconding the emotion with a CA$62 ($48.98) price target, and MKM Partners isn’t far behind with a valuation of CA$55 ($43.45) on Canopy. A fourth analyst, BMO Capital, preceded all of the above with a price target hike to CA$45 ($35.55) last night.

All four analysts kept their official ratings on Canopy stock at the equivalent of hold, but MKM, for example, pointed out that Canopy did beat earnings yesterday, while BMO said it is confident Canopy can hit its ambitious targets for cost reduction and increased profits next year. For its part, Cantor Fitzgerald pointed out that Canopy is a bellwether for the marijuana industry — which explains why Canopy’s peers are enjoying higher stock prices on the back of Canopy’s news.

Now what

Now, it’s worth pointing out that there’s some dissent in the ranks of analysts covering Canopy, and not everyone is as happy with yesterday’s results as are these four. Already, analysts at Benchmark have downgraded Canopy shares from buy to hold, for example, while Cannacord Genuity cut Canopy stock to sell and Cormark downgraded the stock to reduce (which happens to also mean “sell”).

Meanwhile, Stifel Nicolaus, which already had a sell rating on the stock, doubled down on that opinion today. Stifel called yesterday’s stock price rally (and today’s) “perplexing” given that Canopy’s revenue growth was “underwhelming,” its challenges “underappreciated,” its cash requirements “significant” — and its valuation overpriced.

And I agree.

Don’t get me wrong — I’m all in favor of investors having a good day and making a profit on a stock they believe in. From my perspective, though, the fact that Canopy Growth suffered a decline in gross profit margins of 15 whole percentage points in fiscal Q3 is no cause for celebration. And as for the company’s promise to turn all of this around and generate a profit — but only when calculated according to “adjusted” earnings before interest, taxes, depreciation, and amortization (EBITDA)? And to do this no sooner than the second half of next year?

That simply doesn’t justify adding $2.2 billion to Canopy Growth’s market capitalization over the course of the last two days.

Or to put it more simply: 46 times sales is too much to pay for an unprofitable pot grower.

This article represents the opinion of the writer(s), who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Latest posts