Marijuana stocks Tilray (TLRY) and Cronos Group (CRON) rallied Monday, even as an analyst questioned the big bet by Corona beer parent Constellation Brands (STZ) on Canopy Growth (CGC). Meanwhile, Canadian pot producer Aurora Cannabis made a big advance into South America.
‘Little Certainty’ In Canopy Growth
SunTrust analyst Bill Chappell downgraded Constellation Brands stock to hold, saying there was “little certainty” in its $3.8 billion investment in Canopy Growth, a big Canadian marijuana cultivator, last month.
Chappell wrote in a research note on Monday that the investment would “keep a cloud over the stock (pun intended) for at least the next few quarters.” He said he had no problem with Constellation Brands investing in the cannabis industry, adding that demand for cannabis products would likely grow as legalization spreads.
“Where we have concerns is STZ or anyone’s attempt to (1) define the eventual size market, (2) pick the eventual winners, and (3) forecast the potential revenue or profits for any player,” Chappell said.
The downgrade follows concerns that marijuana stocks are forming a dotcom-esque bubble that could soon burst. It also follows Northland Capital’s downgrade last week of Tilray stock, which in July became the first pure-play marijuana IPO on a U.S. exchange.
Chappell said his biggest concern is Constellation’s expectation for Canopy to eventually produce operating margins around 30%.
“Based on what?” he wrote. “Yes, Canopy is one of the largest players in the market today, but it is certainly not the only player out there.”
He also pointed to research from the Marijuana Policy Group saying that in Colorado marijuana edibles, which includes beverages, only made up 5% of cannabis consumption. As cannabis executives talk up the plant’s recreational and medical potential, Chappell also said that it could take years before consumers replace the alcoholic drinks and sleep aids they currently use with cannabis.
“This means altering behavior and, in our view, behavior change can take years to occur,” he said.
Marijuana Stocks Hold Up
Shares of Cronos gained 1.25% in the stock market today. Canopy Growth stock climbed 1.6%. Tilray jumped 10%. All three marijuana stocks are near recent all-time highs, but didn’t hit them Monday. Constellation Brands stock was up 0.2% on Monday, hovering near its 50-day line.
Constellation Brands CEO Rob Sands said last month that the cannabis industry could be among the “most significant global growth opportunities for the next decade.”
The beer-and-wine giant said in June that it had recognized more than $700 million in gains since it first invested in Canopy last year. Alcohol companies, in public disclosures over the past several years, have expressed worry about the potential sales impact if parts of the world legalize cannabis.
450,000 Kg Of Pot
Aurora Cannabis on Monday said it had agreed to buy ICC Labs. Marijuana company ICC Labs is based in Vancouver but Aurora says ICC controls more than 70% of the marijuana market in Uruguay. Uruguay legalized marijuana last year.
Under the deal, Aurora Cannabis will buy ICC in a deal worth 290 million Canadian dollars ($220.4 million). The deal, Aurora said, would establish the company as “the industry leader in South America.” ICC, it said, holds licenses to make medical marijuana in Colombia.
ICC owns two greenhouse facilities, three outdoor growth facilities set to begin cultivation this year, as well as two more under construction — with production estimated to exceed 450,000 kilograms a year. Aurora also cited ICC’s “deep background in pharma and the ability to grow low-cost CBD-rich hemp at very large scale”.
CBD, or cannabidiol, is a non-psychoactive component of the cannabis plant that is often used for pain relief. Uruguay’s regulations allow the cultivation of CBD-rich hemp on a commercial level, Aurora said.
“ICC is an ideal partner for Aurora to establish leadership in the South American cannabis market, delivering clear first mover advantage on a continent with over 420 million people,” Aurora CEO Terry Booth said in a statement.
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