What happened
Marijuana investors were treated to rare a bifurcated day on Wednesday -- one of those infrequent days in which cannabis stocks didn't just all move up or down en masse, but in which there were both winners and losers.
As of 11:05 a.m. ET, small-cap Sundial Growers (SNDL) is leading the winners higher with a 4.2% gain. In contrast, Canopy Growth (CGC 20.65%) is down 2%, and Hexo (HEXO) is falling even further with a 3.4% loss.
Image source: Getty Images.
So what
What's moving the market today? The most obvious answer is: Bank of America.
In a note out this morning on StreetInsider.com, BofA cut its rating on Canopy Growth from neutral to underperform (sell) on worries that Canopy Growth is falling behind the competition in Canada.
On the one hand, the banker agrees with marijuana bulls that there's "long-term potential [in] the legal global cannabis industry, driven by U.S. Federal legalization and changing attitudes toward cannabis consumption." On the other hand, BofA fears that Canopy Growth isn't living up to that potential.
"Canopy has shown mixed progress on key performance metrics," scolds BofA, and "is confronted with a rapidly evolving Canadian market with new entrants taking market share." Although encouraged by the company's sizable cash reserves and its backing by Constellation Brands, in the context of "lackluster industry growth even with new stores opening and limited visibility for profitability," BofA simply doesn't see Canopy as a good way to play the trend of eventual marijuana legalization -- hence the downgrade.
Now what
Given this Canopy downgrade, it's no huge surprise to see Hexo stock falling too. After all, one of the few things BofA likes about Canopy is the fact that, although unprofitable, Canopy has a $1.5 billion cash cushion that will enable it to keep losing money a bit longer before it has to raise more cash or throw in the towel. In contrast, Hexo's bank account looks positively tiny with just $43 million at last report.
(Both companies, by the way, carry a lot of debt alongside that cash, but Canopy's $1.5 billion in cash at least outweighs its $1.3 billion in debt. Hexo's $317 million debt load is seven times the size of its cash reserves.)
This cash analysis may also explain why Sundial is avoiding today's downturn and actually even eking out some stock price gains. With $585 million cash in the bank, and a debt load of only $19 million, Sundial is arguably in a better position than either Canopy or Hexo. Granted, Sundial isn't any more profitable than either of those others. But it's arguably got enough cash to remain in business -- even if it's losing money -- for longer than those others as well.
Maybe even long enough to see marijuana legalized in the U.S., and to profit from it.
