What happened
Marijuana legalization is coming to America -- eventually -- and Canopy Growth (CGC 14.23%) is the Canadian cannabis stock most likely to profit from it.
That was the good news Friday, according to Bank of America -- but here's the bad news: Even Canopy Growth stock isn't priced cheaply enough to be particularly profitable for investors, and that's why Bank of America downgraded it.
Image source: Getty Images.
So what
Canopy Growth stock is both "best positioned among Canadian producers to enter the U.S. upon federal legalization," writes TheFly.com, reporting on Bank of America's note Friday morning. It's also a stock with long-term growth potential, argues the bank's analyst. Nevertheless, Canopy's growth rates appear to be "lagging" right now, and so is the company's profitability. In the analyst's opinion, Canopy's promise to achieve positive earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of its fiscal 2022 (which will end March 31, 2022) are predicated on the company reaching sales targets that it may actually miss.
For all of these reasons, BofA feels it can no longer defend its prior $33.88 price target on the stock, nor its former buy rating. So it downgraded Canopy shares to neutral with a $17.50 price target -- barely half the old target. Shares were trading in the $13 to $14 range Friday.
Now what
And now here's the really bad news: If Bank of America's analyst feels that Canopy Growth is the best marijuana stock out there, but can't even recommend buying it, what does that imply about all the other marijuana stocks that the analyst feels are inferior to Canopy Growth?
Doesn't it suggest that investors should stay away from the entire cannabis sector?
It might not seem fair to paint the whole industry with a broad brush in this manner. After all, while some cannabis companies -- Sundial Growers (SNDL 7.18%) for example -- are fully as unprofitable as Canopy Growth, others -- like Green Thumb Industries (GTBIF 1.30%) -- are not only profitable, but generating positive free cash flow as well.
Nevertheless, this does appear to be how investors are interpreting the Canopy downgrade. As of 12:10 p.m. Friday, Canopy Growth shares were down by 4.9%, shares of Sundial were down by 2.5%, and Green Thumb Industries was off by 2.3%.
Oh well. No one ever accused investors of being perfectly rational.
