3 stocks of marijuana to buy and 1 to avoid, according to Merrill Lynch

Text size

Cannabis stocks were a volatile group but largely outperformed in 2019. Yet Bank of America Merrill Lynch warns that while some companies respect the hype, others get too high, too fast and investors could be burned.

The story back. Many marijuana stocks, including
Aurora Cannabis

Forest cover growth (CWB), and
Cronos Group

(CRON), grew by more than 50% in 2019, from institutions to core consumer giants, to retailers seeking to become familiar with what should be a fast-growing market, from recreational uses to medical applications. and related products such as CBD oil.

However, the group was not directly boosted, as it was hit hard by profits, insider sales, banking restrictions, analysts' skepticism and the fight for a quality supply, even a supply in some cases.

Then there is the fact that although marijuana is legal in Canada, the situation is less clear in the United States, with each state setting its own rules for (or against) legalization, and federal approval does not seem imminent. Investors have trouble guessing which companies will ultimately succeed in this ever-changing landscape.

What's up. Wednesday, BofA Merrill Lynch's Christopher Carey coverage initiated on a handful of cannabis stocks, with three purchase ratings and underperformance. His bullish choices are Aurora Cannabis, Canopy Growth and HEXO (HEXO), the latter being the most attractive of the trio, while he thinks that investors should stay away from Cronos.

Carey expects that an underdeveloped supply chain will continue to undermine Canadian cannabis companies. Although the market seems to be preparing for this, its estimates for 2019 and 2020 are still below consensus. Yet, in this environment, he still thinks that his stock at purchase can outperform.

Look to the front. Given that bans on marijuana have recently begun to crumble, it is not surprising to see the lack of infrastructure to meet the new legal demand. Carey argues that a number of these problems are temporary, which means that recent setbacks could be an opportunity to purchase.

"We believe that the constraints of Canadian distribution channels could encourage companies, especially larger ones with capital, to seek out strategic actions in international jurisdictions, including the ability to transact in the US and Europe. Indeed, the longer the problems associated with the Canadian chain, the more likely that these actions become, in our opinion, a catalyst, "he writes.

In Barron According to you, it may be too early in the game to name specific winners in the long run.

Carey's price targets for Aurora, Canopy, HEXO and Cronos are $ 11, $ 52, $ 10 and $ 13, respectively.

Aurora is up 1.5% to $ 9.01 recently, while Canopy, up 2.4% to $ 42.67, HEXO up 5.3% to $ 6.26 and Cronos up from 1% to $ 15.94.

Write to Teresa Rivas at [email protected]