Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking three high-profile Wall Street picks and putting them under the microscope...
Excited by the growth prospects, many investors may view marijuana stocks as a group -- stocks to buy, or stocks to sell, en masse. (Don't believe me? In January, 15 separate marijuana stocks marched at least 50% higher -- that can't be a coincidence.) But not so fast, warn the analysts at Jefferies & Co. Not all marijuana stocks are created equally -- nor valued equally, either. Some might be worth buying, some only worth holding, and others should be sold.
And today, Jefferies named names. Read on to find out which U.S.-listed marijuana stock they think is your best bet -- and which one you should run away from.
Buy Aurora Cannabis
I won't keep you in suspense: Jefferies' top-rated U.S.-listed marijuana stock to buy is Aurora Cannabis (NYSE:ACB). This morning, Jefferies initiated coverage on nine separate cannabis stocks, as reported by StreetInsider.com (subscription required). The analyst handed out no fewer than five separate buy ratings, but the only one of these five currently trading on a major U.S. stock exchange is Aurora Cannabis.
Aurora Cannabis operates in 23 countries and is targeting peak pot production in excess of 500 metric tons per year. Right now, it's focusing on producing pot for the medical marijuana market in Canada. Just this morning, in fact, it announced that two of its facilities have become "fully licensed by Health Canada for the production and sale of cannabis and cannabis derivative products," part of a "rapid scale-up of [Aurora's] production capacity."
Aurora stock may be down 34% from its highs of early October, but Jefferies says the company has "infrastructure in place to strongly accelerate near term Canadian sales as derivative products come on line, and US optionality [will] become more visible" over time. The analyst thinks that as Aurora continues to scale this year, there is "further upside" to the shares.
Accordingly, Jefferies gives Aurora a buy rating and a target price of 12 Canadian dollars, which works out to about $9.11 -- or 31% upside from present prices. The analyst says, "Aurora, along with Canopy, is best placed to dominate globally in the years ahead."
Hold Canopy Growth
Speaking of Canopy, let's discuss Canopy Growth (NYSE:CGC). The first marijuana stock ever to list on the New York Stock Exchange, Canopy got a big boost in November when beer producer Constellation Brands invested $4 billion in its business.
Combined with the most popular marijuana brand name in Canada, and a network of physical stores to sell it out of, this gives Canopy a good base to grow off of. Fool.com contributor Sean Williams estimates that, like Aurora, Canopy could probably produce about 500,000 kilograms of pot once it is "fully operational."
But here's the thing: Whereas Aurora lost 34% of its value over the last four months, and remains down, Canopy lost nearly half its value from October to December -- then made most of it back. Priced north of $43 a share today, the stock is now only about 13% off its October highs, and as Jefferies opines, its current price "has appropriately captured [Canopy's] strong positioning."
With $312 million in trailing losses and a valuation of 129 times its trailing revenue, Jefferies says it "struggle[s] to justify adding to positions at these levels." Accordingly, the analyst rates Canopy Growth stock only hold, with a price target that works out to about $48.57.
Sell Cronos Group
Last and least we come to Cronos Group (NASDAQ:CRON), the the first marijuana stock to list on the Nasdaq. While Canopy's big claim to fame is its $4 billion investment from Constellation Brands, Canopy won the promise of a $1.8 billion investment from tobacco giant Altria Group in December. At Cronos' current market cap, that would make Altria about a 50% owner of Cronos stock.
Cronos Group is the single U.S.-listed pot stock that Jefferies rates a sell today. As the analyst explains:
While historically a solid operator, at present we feel there is little to get really excited about other than the investment and large sum of money from Altria. We also question when Altria value creation will begin to materialise, especially as there appears little near-term appetite to put the Altria money to work. Against this backdrop we think the market has gotten ahead of itself.
To see why Jefferies might think this, consider: Aurora Cannabis -- Jefferies' favorite marijuana stock -- costs only $6.9 billion (less than twice Cronos' $3.9 billion market cap). However, Aurora's $90 million-plus in trailing sales were more than 10 times Cronos' sales of less than $9 million.
Let me say that again: Aurora sells 10 times as much pot, but costs less than two times as much as Cronos.
Check out the latest Cronos earnings call transcript.
The upshot for investors
Jefferies' conclusion that Cronos is overvalued and likely to underperform the market as a whole (and I suspect, to underperform Aurora and Canopy as well) makes perfect sense to me.
Admittedly, I personally wouldn't buy any of these marijuana stocks. Even Aurora's valuation of 77 times sales is too rich for my blood. But comparing them to each other, Jefferies is right to prefer Aurora over Canopy, and Canopy over Cronos.