Bank Of America Initiates Coverage On Cannabis Stocks, Names Surprising Top Pick

The cannabis sector received one of its biggest votes of confidence yet from Wall Street on Wednesday when a top firm initiated coverage on four cannabis stocks.

The Analyst

Bank of America analyst Christopher Carey initiated coverage of the following stocks:

• Aurora Cannabis, Inc. ACB, Buy rating, C$15 target (US $11).
• Hexo Corp HEXO, Buy rating, C$14 target ($10).
• Cronos Group Inc CRON, Underperform rating, C$17 target ($13).
• Canopy Growth Corp CGC, Buy rating, C$70 target ($52).

The Thesis

Carey said Hexo is Bank of America’s top cannabis stock pick thanks to its compelling market positioning.

“HEXO is our Top Pick in cannabis, screening compelling in our valuation framework vs peers (EV/sales and DCF), and with fundamentals grounded by the most de-risked cannabis supply in Canada (off-take with Quebec), an innovation-forward organization and potential for additional value-add partnerships (beyond that already developed with Molson Canada),” Carey wrote in a note.

Carey is also bullish on Canopy Growth and Aurora. He said Canopy’s 6 million square feet of production capacity and its partnership with alcoholic beverage leader Constellation Brands, Inc. STZ have it well-positioned to be a long-term market leader. Carey said Aurora is one of the few cannabis companies setting up a global operation, and it has yet to announce a major partnership, leaving open the possibility of a major bullish catalyst.

The only cannabis stock Carey isn't recommending is Cronos. He said Cronos has an impressive balance sheet, but the stock is simply too expensive after more than doubling in the past year.

Price Action

Here’s how the four stocks mentioned were trading Wednesday following the initiations:

• Canopy Growth was up 2.8 percent at $42.91.
• Cronos was down marginally at $15.79.
• Hexo was up 10 percent at $6.55.
• Aurora was up 1.5 percent at $9.01.

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