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Why Curaleaf, Canopy Growth, and Hexo Stocks Are Glowing Green Today

By Rich Smith – Nov 8, 2021 at 1:30PM

Key Points

  • Canopy Growth got triple-downgraded Monday -- but its stock is up anyway.
  • An acquisition by Curaleaf could be part of the reason -- and a signal of more consolidation to come.
  • Meanwhile in Congress, a Republican representative plans to introduce legislation that might offer a bipartisan compromise route to federal marijuana legalization.

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Wall Street predicted marijuana sector mergers -- and we just got one.

What happened

Marijuana stocks were off to the races Monday: As of 12:20 p.m. EST, Curaleaf Holdings (CURLF 4.74%) had risen 7.4%, Canopy Growth (CGC 6.16%) was up 7.9%, and Hexo (HEXO -2.45%) was leading the pack higher with an 11.5% gain.

Curiously, the day's news in the space isn't all good.

Marijuana plants

Image source: Getty Images.

So what

Turns out, Canopy Growth is the outlier, enjoying its big gains despite suffering downgrades from analysts at three separate Wall Street firms -- CIBC, Cowen & Co., and Canaccord Genuity. What's more, two of the three bankers dropped Canopy all the way to sell -- Cowen gave it a more gentle cut to market perform, reports

Nevertheless, Canopy Growth is rebounding from its Friday sell-off, and part of the reason for this -- the reason all three stocks are rising higher Monday, I suspect -- is because of what Curaleaf just announced.

If you recall, it was just one week ago that a Wall Street analyst at Cantor Fitzgerald told investors to expect mergers and acquisitions in the marijuana industry, and predicted that such activity could "be the main driver of ... growth" for certain marijuana stocks. Well, on Monday, Curaleaf seems to be proving that analyst right. It announced a $286 million cash-and-stock deal to buy privately held multi-state operator Tryke Companies, which cultivates, processes, and operates dispensaries to sell cannabis, and does business under the name "Reef Dispensaries."  

Curaleaf will pay $40 million in cash up front for Tryke, plus a further $75 million and 17 million of its own shares to be paid out in installments over the next three years.

Now what

Curaleaf expects to pull down an extra $110 million a year in sales at 35% EBITDA margins by bringing Tryke in-house, and says the deal will be "immediately accretive" to its EBITDA margins and free cash flow.

The deal values Tryke at about 7.4 times its EBITDA -- a mere fraction of the acquirer's own valuation -- and explains why Curaleaf shareholders are so happy with the news. The prospect of similar deals benefiting other companies in the industry -- as Cantor Fitzgerald predicted -- is probably part of the reason Hexo is up Monday, and why Canopy Growth was able to shrug off the weight of its analyst downgrades.

Finally, we learned over the weekend that U.S. Rep. Nancy Mace (R-South Carolina) is preparing to sponsor a Republican-backed bill to legalize marijuana. While it differs in a range of ways from the legalization bills that have been proposed by congressional Democrats, its addition to the conversation may improve the prospects of some cannabis reform bill or other passing -- and legalizing marijuana at the federal level once and for all.  

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends HEXO Corp. The Motley Fool has a disclosure policy.

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