'Worst Looks Over' For Canopy Growth, Bank Of America Says In Upgrade

Canopy Growth Corp's CGC shares have fallen 65% in the last six months. On Wednesday, the cannabis stock received an upgrade from Bank of America Merrill Lynch, which said Canopy is poised to meet Street expectations. 

The Analyst

Christopher Carey upgraded Canopy Growth from Neutral to Buy with an unchanged CA$24 ($19) price objective. 

The Thesis

Two months ago, Bank of America was "concerned" about the consensus sales estimates for Canopy, but that's no longer the case, Carey said in the Wednesday upgrade note. (See his track record here.) 

The sell-side firm had lowered its rating on the stock at the time with the view that Street estimates for Canopy and its peers were too high given a temporary slowdown in cannabis orders across provinces, the analyst said. 

Now, after considerable consensus cuts, Canopy estimates seem much more achievable, Carey said. 

“Indeed, since our downgrade Sept 27, consensus revenues for the upcoming two quarters– FQ320 (CQ419) and FQ420 (CQ120) –have been cut 32/36%, while FY20/21 is -27/-32%.”

While things are not perfect at Canopy — and the company still has to prove itself — the worst seems to be over, and the market may reconsider Canopy’s potential, he said. 

“Following results last week, we believe this dynamic is now well understood; with the stock -38% vs SPX +5%, valuation 7/5x CY20/21e sales, and estimates appearing achievable, we think risk-reward is sufficiently better to recommend buying shares.”

Price Action

Canopy shares were trading 11.29% higher at $17.05 at the time of publication Wednesday. 

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