By Ciara Linnane, MarketWatch , Max A. Cherney
Analysts advise investors to stay focused on Canopy's long-term potential as the market grows and it cements its leading position
Cannabis stocks fell on Friday, led by Canopy Growth Corp., after the biggest company in the sector measured by market cap reported an unexpected decline in recreational pot sales in Canada in the fourth quarter from the previous one.
Canopy shares (WEED.T) (WEED.T) were down 8.6%, as investors digested its fiscal fourth-quarter report, that showed losses widening from the year earlier, but revenue ahead of estimates. The company said it is still ramping production of cannabis to meet demand, with harvest size doubling in its fiscal fourth quarter -- the first calendar quarter -- and expected to double again in the current quarter. Canopy claimed a gain of more than $77 million in biological assets, or marijuana that was produced in the quarter but not sold, which boosts the bottom line.
For more, read: Canopy Growth earnings show decline in recreational pot sales since launch of legal weed in Canada ()
Jefferies analyst Ryan Tomkins said the losses should be no surprise given the sums the company has been investing, "but given the degree of the losses and the fact that profitability is becoming more of an investor focus, it is likely to cause concern," he wrote in a note to clients.
"We have argued since initiation that Canopy are best positioned to be a true global leader, with the recent Acreage deal further supporting this thesis," Tomkins wrote in a note to clients, referring to the U.S. acquisition that will be Canopy's entry point to the U.S. market, once federal laws are eased.
"With this top line outlook arguably already in the price however, investors now need to start to see bottom line progress for the stock to really kick on," he wrote.
See: Corona-parent Constellation Brands to record $106 million loss as its share of Canopy Growth's losses ()
Piper Jaffray said it still views Canopy as well-positioned in a sector that it believes has $250 billion to $500 billion long-term global potential and a $15 billion to $50 billion near-term opportunity.
"We recognize that there are some growing pains as Canada launches an entirely new industry segment, but we believe F4Q19 revenue growth was appropriate considering Canopy's F4Q19 capacity improvements are more likely to bear fruit in F1Q20," analysts led by Michael Lavery wrote in a note. Piper Jaffray rates the stock at the equivalent of buy.
Don't miss:Canopy Growth's quiet co-CEO on the pot company's ambitions in the U.S. and more ()
Related: In 'the marijuana ghetto' at Davos, Canopy Growth found its American pot partner ()
Stifel analysts said the near-term execution issues were disappointing, if not surprising. Stifel is also a believer in the sector's long-term potential and Canopy's competitive edge, given its strong balance sheet, courtesy of a $4 billion investment from Corona beer distributor Constellation Brands Inc. (STZ) and the fact that it has just sealed a deal that will give it a foothold in the U.S.
"We believe it is important to remain cognizant of the long-term opportunity at hand ($200 billion global category) with Canopy sporting definitive category leadership with the ability to attack all avenues of growth including in the all-important U.S. market," analysts led by Andrew Carter wrote. "We continue with our buy rating."
In regulatory news, Congress on Thursday approved a spending bill that included a rider preventing the Justice Department from using federal funds to interfere with the cannabis business in states that have legalized, as advocacy site Marijuana Moment reported (/). Advocates for legalization welcomed the news, which demonstrates the growing support among lawmakers for the industry as more states legalize. The fate of the bill in the Senate is far from certain, however.
In Oregon, Gov. Kay Brown has signed a bill that will address the oversupply in that market caused by an overly liberal licensing approval process, as Marijuana Business Daily reported (/). A cannabis glut has depressed prices in the state. Senate Bill 218 will allow the Oregon Liquor Control Commission to refuse to issue grower licenses until such time as supply and demand fundamentals improve.
Among individual stocks, Aurora Cannabis Inc. (ACB.T) (ACB.T) was down 3.4%. The company said earlier it is planning a range of new products and categories (cooperation with Pax Labs Inc. as Canada gears up for the legalization of edibles and other derivatives. Aurora is also planning a public awareness campaign on edibles.
Cronos Group Inc. (CRON.T) was down 5.1% and Tilray Inc. (TLRY) was down 5.1%.
Vape and accessories maker Greenlane Holdings Inc. shares (GNLN) slid another 4.8%. That stock has come under pressure from efforts to ban the sale of vapes in San Francisco's city limits.
Aphria shares (APHA.T) (APHA.T) were down 2.4%, Organigram Holdings Inc. (OGI.V) fell 2.5% and Aleafia Health Inc. (ALEF.T) was down 4.8%.
Green Growth Brands Inc.was down 2.2%.
Read:How living near a marijuana dispensary affects your home's price ()
The ETFMG Alternative Harvest ETF (MJ) was down 2.9% with 29 of its 38 constituent stocks falling. The Horizons Marijuana Life Sciences ETFwas off 3.4%, with 44 of its 54 constituents lower.
The S&P 500 and the Dow Jones Industrial Average were up by at least 0.2%.
-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
June 23, 2019 14:23 ET (18:23 GMT)
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