The big day is rapidly approaching. In just over a month, on Oct. 17, recreational marijuana will go on sale in licensed dispensaries throughout Canada. When fully legal, the sale of adult-use weed is expected to usher in high demand and big dollar figures for the industry.
In anticipation of this legalization -- and the big profits that are projected to follow -- marijuana stock investors and Wall Street have pushed the valuations of many pot stocks into nosebleed territory. Some of these marijuana stocks are still valued modestly below Wall Street's consensus price target per share. Conversely, there are a handful of top marijuana stocks whose price targets are well below their current share price. Keeping in mind that Wall Street price targets are nothing more than dart throws by analysts, here are three top marijuana stocks that are expected to lose at least a quarter of their value.
There's arguably no hotter stock in the entire market right now than Canadian medical cannabis producer Tilray (TLRY). After pricing its common stock at $17 per share on July 18, Tilray closed at nearly $105 a share on Wednesday, Sept. 12. For those of you keeping score at home, that's a 517% gain in less than two months. It also puts Tilray within a stone's throw of a $10 billion market cap.
However, Wall Street's consensus price target on the company is just $52 per share, implying downside of just over 50%! Although Tilray doesn't have the same dilutive issues that many of the pot stocks that went public before it do, there are still plenty of concerns about its existing valuation.
For instance, much of this recent run is predicated on the idea that Tilray will soon find a brand-name alcohol, tobacco, or Big Pharma partner. Technically, it already has a Big Pharma partner in Novartis through its generic subsidiary, Sandoz. Nevertheless, betting on a partnership or investment into Tilray -- or any stock, for that matter -- isn't a wise decision.
Beyond the rumors, Tilray has a long way to go to back up its valuation. It'll have an estimated 912,000 square feet of production and processing space complete by the end of the year. With just over 850,000 square feet devoted to growing cannabis, Tilray may not even be in a position to crack into the top-10 growers by peak annual production until next year. Plus, with expansion a priority, Tilray is going to be spending a lot of money, meaning profitability is no guarantee.
In short, I fully agree with Wall Street that Tilray is poised to head lower.
Another top-performing marijuana stock that's been riding the coattails of partnership-mania is Cronos Group (CRON -2.42%). Over the past four weeks, through Sept. 12, Cronos Group's share price is $0.03 per share from having doubled. Yet, according to Wall Street's consensus price target, Cronos Group could have downside of 44%.
To be clear, Cronos Group isn't a complete train wreck. It's expanding into international markets, which will be important for offloading excess Canadian supply, and it somewhat recently formed a joint venture with a group of investors to essentially double its production capabilities with an 850,000-square-foot facility that'll be capable of 70,000 kilograms of cannabis yield per year.
But there are a few issues here that Wall Street clearly has concerns about. For starters, even though Cronos is going to be capable of perhaps 140,000 kilograms of annual production, it's going to be a while before it all comes online. That's going to make it difficult for the company to secure lucrative long-term supply deals.
At the same time, spending on capacity expansion and its international infrastructure is going to make it incredibly difficult for the company to turn a meaningful per-share profit. In fact, Cronos Group is currently valued at close to 150 times next year's profits -- and this figure may move even higher if the company's outstanding share count continues to balloon from bought-deal offerings.
Put simply, there are far better values out there in the peak annual production range of 100,000 kilograms to 150,000 kilograms (ahem, OrganiGram Holdings) than Cronos Group.
Canopy Growth Corp.
Last, but certainly not least, the largest marijuana stock by market cap, Canopy Growth Corp. (CGC -8.58%), the company that set off this wave of partnership and investment speculation over the past month, is projected by Wall Street to lose 25% of its value, assuming the consensus price target is accurate.
Canopy Growth set the industry ablaze when, on Aug. 15, it announced that Modelo and Corona beer-maker Constellation Brands (STZ 0.41%) would be taking a $3.8 billion equity stake in the company. This was Constellation's third such investment in the world's largest pot stock by market cap. Assuming the deal gets the nod from regulators, and Constellation receives and exercises its 139.7 million warrants, it could become a majority stakeholder in Canopy Growth (i.e., over 50% ownership).
Of the three pot stocks here, Canopy Growth's valuation does come the closest to making sense. It has the best-known cannabis brand in Canada (Tweed), has a multichannel system to sell its products, is poised to operate in numerous foreign countries, and has the marketing expertise of Constellation Brands in its corner.
Perhaps the fatal flaw in the near term for Canopy Growth is the fact that its excessive spending on capacity expansion, brand building, and infrastructure in foreign markets is liable to keep it losing money throughout the remainder of its current fiscal year. Sure, Wall Street and investors have given Amazon a free pass for reinvesting its operating cash flow, but there's no guarantee they'll do the same for Canopy Growth.
As with Tilray and Cronos Group, I'm in agreement with Wall Street that a move lower seems likely.