Cannabis Analyst Talks Canadian Price Deflation, Names Aphria Top Stock Pick

The growth thesis for Canadian cannabis stocks certainly hasn’t played out the way investors had hoped in 2020. One of the biggest headwinds legal producers have faced this year is extreme price deflation in the Canadian market.

Flower Prices Falling: Canadian flower prices are down 33% since mid-2019, according to Cantor Fitzgerald analyst Pablo Zuanic.

Zuanic said his price deflation has been a major drag on LPs that are heavily reliant on flower, including Aurora Cannabis Inc ACB and Canopy Growth Corp CGC.

While price deflation is not a reason to avoid LPs all together, Zuanic said investors need to continue to be selective in the space.

“Net, top down, we think there are reasons to remain cautious on the Canadian LPs (recent strength is explained by expected collateral effects from further US deregulation; although whether these companies have the funds/platforms to benefit varies by LP),” he wrote in a note.

Related Link: Analyst Previews Cannabis Earnings: Green Thumb Positioned To Beat By Hefty Margin

How To Play It: Zuanic named Aphria Inc APHA his top stock pick among Canadian LPs due to its relatively low flower exposure and its impressive market share gains. Zuanic said Aphria is not immune to price deflation, but it has been gaining market share during the difficult period while Canopy and Aurora are losing it.

In the past month, Aphria’s flower prices were down 36% compared to a year ago compared to a 38% decline for Canopy and a 38% drop for Aurora. Flower sales represent 53% of total cannabis industry revenues in Canada. Flower represents 67% of Aurora’s business and 65% of Canopy’s sales but only 51% of Aphria’s domestic revenue. Tilray Inc TLRY has even less flower exposure at just 31% of total domestic sales.

In addition to Aphria, Zuanic’s top Canadian LP stock picks are Aurora and OrganiGram Holdings Inc OGI.

Benzinga’s Take: Cannabis stocks have rallied in recent weeks on optimism that a potential Democratic blue wave in November could open the door to more accommodative federal cannabis laws in the U.S. market. Cannabis stock investors can help mitigate risk associated with the volatile industry by buying a basket of Canadian legal producers and U.S. multi-state operators that have high-quality balance sheets and leading market shares.