Canopy Growth initiated as a Hold at Jefferies, but still ‘set up for global domination’

Marquee Canadian cannabis company Canopy Growth Corporation (CGC, WEED.TO) is a known frontrunner in the budding cannabis industry – but that has left little room for the stock to run in the near-term, according to at least one Wall Street firm.

“Unlike some other names where operational excellence has perhaps gone under the radar, the same cannot be said for Canopy, probably as a result of a number of factors, such as the significant Constellation investment, the U.S. listing, and a very investor-facing approach with large amounts of media coverage,” Jefferies analyst Owen Bennett wrote in a note Monday. “Valuation appears to be capturing its strong outlook.”

Jefferies on Monday became the latest Wall Street firm to initiate coverage on the cannabis industry and offered 5 Buy, 2 Hold and 2 Underperform ratings for the stocks in its coverage.

The firm rated shares of Canopy at Hold with a price target of C$64, or about 9% over Friday’s closing prices. According to Bloomberg data, Canopy Growth Corporation has 9 Buys, 5 Holds and 1 Sell rating among analysts on the Street.

But Canopy’s relatively expensive stock is in good company in the cannabis space as puffery around the new industry propelled share prices, Bennett added.

“To date, with little financial data, share price performance has been driven by metrics such as capacity and headlines around events such as M&A and external investments. In our view, this has led to some inflated or miss-priced valuations,” Bennett said of the cannabis industry as a whole. “The market is taking larger capacity or certain deals as a validation of superior fundaments due to the fact there is very little else to base an investment case on at present.”

“As we now begin to lap a full year of recreational legalization in Canada, and financial data becomes more readily available, valuations will increasingly be driven by financial performance and delivery, and true fundamental strengths and weaknesses should become more visible,” Bennett said.

Canopy Growth, which listed on the New York Stock Exchange in October, delivered much better-than-expected top-line results for the third quarter, while reporting a narrower gross margin. Shares of the company have risen about 66% for the year-to-date through Friday.

Valuation concerns aside, Canopy has “done everything right with regards to positioning itself as a long-term leader in the cannabis space,” Bennett acknowledged. The company’s advertising push to become a default recreational brand in Canada and its strong international footprint on account of its regional manufacturing facilities have poised it to be “set up for global domination,” he said.

Bennett also viewed favorably Constellation Brand’s (STZ) relationship with Canopy following the beverage company’s $4 billion investment into the Canadian cannabis company, which closed in November.

“Constellation has put in sizable capital and has a pathway to control, so is fully committed to seeing Canopy succeed. We are already seeing evidence of this with the collaboration around Canopy's bottling plant (to be completed by the summer) and we think they could prove key for growing a future U.S. business via distribution support and regulatory muscle,” Bennett wrote.

Cronos

Bennett was relatively less optimistic about other investments in the cannabis space for the near-term, including Altria’s (MO) $1.8 billion investment in Cronos (CRON, CRON.TO). Bennett delivered a bearish call for the Canadian cannabis company, with an Underperform rating and a price target of C$17.

“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,” Bennett said of Cronos. “We also question when Altria value creation will begin to materialize, especially as there appears little near-term appetite to put the Altria money to work.”

While Constellation’s investment has come alongside manufacturing guidance to Canopy, the same kind of counsel has not yet appeared from Altria for Cronos, suggesting that the near-term benefits to operational support for Cronos could be limited, Bennett said.

“Altria will likely prove a big advantage for distribution/regulatory muscle in the U.S., but to take advantage of this at present, it needs to be done via hemp CBD and we’re not aware of any current Cronos access to U.S. hemp/hemp CBD partnerships,” Bennett said. “Finally, there appears little appetite from Cronos to put the Altria money to work in the near-term.”

Shares of Cronos are up about 110% for year-to-date.

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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