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Why Marijuana Stocks Wilted Today

By Rich Smith - Updated Jan 25, 2021 at 4:28PM

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Analysts point out: Oversupply and falling prices aren't good for profits.

What happened

Marijuana stocks' three-month run higher appeared to hit a brick wall Monday, with shares of Aurora Cannabis (ACB 7.75%) closing 4.6% lower, HEXO (HEXO 5.87%) dropping 8.7%, and Aphria (APHA) stock falling 7%. Fellow marijuana grower Tilray (TLRY), with which Aphria is merging, also closed the day down, 4.6%.

Only one of these four cannabis companies was mentioned in the news today, and that was a positive report. 

Wilted marijuana plants

Image source: Getty Images.

So what

Early Monday morning, analysts at Cantor Fitzgerald raised their price target on Aurora Cannabis by 33%, reports StreetInsider.com. Although Cantor kept its neutral rating, its new price target of $12.55 implies there's actually quite a bit of upside left in the stock at 23.5%.

But as MarketWatch reported in the afternoon (after the price target hike), there have been some rumblings on Wall Street that all may not be well with the marijuana industry. Foothill Capital Management's Korey Bauer was quoted worrying about oversupply in Canada. Alliance Global Partners analyst Aaron Grey also warned that pricing pressure persists.  

Now what

Not all the news is bad. The Province of Ontario is apparently getting ready to increase the number of stores authorized to sell cannabis, Grey said. And even if legalization doesn't happen at the federal level in the U.S. this year, Grey suggests that marijuana-favorable state laws remain a positive catalyst.

The question is whether the increase in sales in Canada and in the U.S. will be enough to soak up Canada's oversupply of cannabis. Otherwise prices will fall, as will profits.

In fact, data from S&P Global Market Intelligence shows that neither Aurora Cannabis nor Aphria has booked a GAAP profit since 2018, and HEXO hasn't earned a profit ever.

Now, all three companies need to dig themselves out of a hole just to break even -- in an economic environment characterized by oversupply and falling prices.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.53 (7.75%) $0.11
HEXO Stock Quote
HEXO
HEXO
$0.24 (5.87%) $0.01
Tilray Stock Quote
Tilray
TLRY
Aphria Stock Quote
Aphria
APHA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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