Huge Buying Opportunity in Marijuana Stocks as Short Sellers Pounce

Companies and Brands

Published: July 19, 2019 6:50 am

Last Updated: January 30, 2020 6:23 pm

It always happens when there is a new kid on the block. The huge interest and momentum buying drives up shares as people hungry to get in pay more than they should for fear of missing out. It happened during the dot-com bubble 20 years ago, and it’s happening now as the marijuana industry grows, and the United States looks to be edging toward legalization.

Already, 11 states have legalized recreational sales, as has the country of Canada, but as with any nascent investment idea, stocks that go sky-high often come crashing back to earth as short sellers invade. We recently covered the surge in short interest in the industry.

The good news for investors that may have missed the first train that left the station is that the quality cannabis stocks have all backed up. For those with a long-term horizon, now may be a good time to buy some shares, put them in your account and be patient.

Merrill Lynch has five pot stocks rated Buy, and all have solid upside potential.

Aurora Cannabis

This company has made a string of acquisitions to grow the scale of its overall business and saw industry-leading sales in the first quarter. Aurora Cannabis Inc. (NYSE: ACB) produces and distributes medical cannabis products. It is vertically integrated and horizontally diversified across various segments of the cannabis value chain, from facility engineering and design to cannabis breeding, genetics research, production, derivatives, high value-add product development, home cultivation, wholesale and retail distribution.

The company’s products consist of dried cannabis and cannabis oil, CanniMed vegan capsules and hemp products, as well as sells vaporizers, consumable vaporizer accessories and herb mills for using herbal cannabis products. It also operates CanvasRX, a network of cannabis counseling and outreach centers, and it provides cannabis analytical product testing services.

Merrill Lynch has a $10 price target on the shares, but no Wall Street consensus target was posted, even though other analysts cover the company. The stock was last seen trading at $6.95 per share.

CannTrust

This could be an off-the-radar play for investors looking for a marijuana play with lower name recognition. CannTrust Holdings Inc. (NYSE: CTST) produces and distributes pharmaceutical-grade medical cannabis products in Canada. It sells dried cannabis and oil extractions to clients based on the medication documentation provided by health care practitioners. The company has a partnership with Gold Coast University Hospital.

CannTrust also focuses on developing nanotechnology to create new products in the medical, recreational, beauty, wellness and pet markets. In addition, the company recently completed a successful secondary offering, and management noted in late April that it expects to report strong first-quarter results.

The Merrill Lynch price target for the shares was $8. The stock closed trading on Thursday at $2.93 a share.

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Canopy Growth

This is among the largest marijuana companies from a market capitalization basis. Canopy Growth Corp. (NYSE: CGC), with its subsidiaries, engages in growing, possession and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules and hemps. The company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs by Snoop, Bedrocan Canada, CraftGrow and Foria brand names

The company also offers its products through Tweed Main Street, a single online platform that enables registered patients to purchase medicinal cannabis from various producers across various brands. The company was formerly known as Tweed Marijuana and changed its name to Canopy Growth in September 2015.

Merrill Lynch has set a $53 price target on the shares, which ended Thursday’s trading at $35.80 apiece.

Cronus

A major international company took a large position in Cronus Group Inc. (NASDAQ: CRON) late in 2018. This is a global cannabis company founded in 2012 and based in Ontario, Canada, with a presence across five continents. Its principal activities are the production and sale of cannabis and cannabis-derived products in federally legal jurisdictions.

Back in December, Altria agreed to buy a 45% stake in the company for about $1.8 billion, a sign of the new world in which the tobacco company must compete. This strategic partnership provides Cronos with additional financial resources, product development and commercialization capabilities, as well as deep regulatory expertise, to better position the company to compete, scale and lead the rapidly growing global cannabis industry. The stake also gives Altria the option to increase to full ownership if it so chooses down the road.

The $19 Merrill Lynch price target compares with Thursday’s closing share price of $14.96.

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Hexo

This is another popular stock in the fast-expanding marijuana arena. Hexo Corp (NYSE: HEXO) is a diversified company, selling a portfolio of cannabis and related products. The company is based in Quebec, where it is a preferred supplier to the province’s provincial cannabis purchaser. The company also has national distribution, with plans to expand internationally.

Through its hub and spoke business strategy, Hexo partners with Fortune 500 companies, bringing its brand value, cannabinoid isolation technology, licensed infrastructure and regulatory expertise to established companies, leveraging their distribution networks and capacity. As one of the largest licensed cannabis companies in Canada, Hexo operates with 1.8 million square feet of facilities in Ontario and Quebec, and a foothold in Greece to establish a eurozone processing, production and distribution center. The company serves the Canadian adult-use and medical markets.

The analysts at Merrill Lynch have an $8 price target, while the stock was last seen trading at $5.00.

It’s very possible we could see an increasing number of states legalizing the recreational use of marijuana, as the consumer demand is there, as is the potential for huge tax windfalls. Illinois was the most recent of the 11 states in the United States to legalize recreational use and sales, starting on January 1, 2020. Savvy investors should take advantage of the big dip in prices to add to positions or start new ones.