Pot stocks had a rough 2019 but there’s one among them that one expert analyst says is a buy right now.
Canopy Growth (NYSE: CGC) is down more than -50% over the last year. The stock took a dive after the company’s co-CEO, Bruce Linton, was fired last summer following a larger-than-expected loss in diluted stakeholder Constellation Brands’ own earnings, and then hit its lowest point in November as confidence waned around Canadian cannabis stocks.
However, so far this year, the stock has popped and is up nearly 12% since the beginning of 2020. Then shares of the Canadian grower gained 11% on Tuesday this week on an upgrade from BMO Capital Markets analyst Tamy Chen.
Chen issued an Outperform rating for CGC shares—up from Market Perform—and raised her price target from C$25 to C$40 – nearly 30% higher than the price as of this writing.
In the note, the BMO analyst said that Canopy has suffered from “industrywide challenges” over the past year, as well as a “suboptimal [recreational] product mix.”
But according to Chen, “there is potential upside to Street expectations for FQ3/20 driven by the company’s pivot into a rec product mix that should now be better aligned with demand.”
“The timing of our upgrade is based on our view that at this point, even a modest beat in FQ3/20 results could begin to shift investor sentiment on the stock,” Chen wrote in the note.
The analyst added that “we believe the stock at current levels offers a better relative return profile considering that a number of other LPs with value-priced brands will likely continue to be at risk of requiring additional findings,” referring to licensed producers of pot in Canada.
BMO’s Chen isn’t the only analyst bullish on Canopy Growth shares. Bank of America analyst Christopher Carey reiterated his Buy rating on the stock this week with a C$36 price target.
However, Carey cautioned, “Canopy sales must be much higher to breakeven on profit.”
According to the BofA analyst’s calculations, Canopy would need to generate around C$260 million in quarterly net sales to breakeven, versus C$109 million the company reported in its fiscal Q2 2020.
Carey did however point out that there are positive scenarios that could be catalysts for Canopy growth, including cannabis legalization on the federal level in the U.S. or Canada speeding up new store openings, though he said the more realistic scenario would be Canopy getting a better handle on its costs.
“Balancing the long-term potential with near-term profitability (namely cash preservation) is the fine line,” Carey said, adding that Canopy’s new CEO David Klein has enough professional expertise to help the cannabis company move forward.
“We think the time may be right for Canopy to take more decisive action to right-size costs for the near-term realities,” Carey said. “Obvious areas include facilities either under-utilized or not producing, strategic spending, and sales and marketing.”