After warning in early January about the heightened risk of a healthy pullback in the cannabis sector, Beacon Securities analyst Vahan Ajamian says the correction he correctly predicted is probably done.
With the average North American cannabis stock down 35 per cent since his January 8th call, pessimism abounds in the pot space. But Ajamian says that while no two corrections are the same, the pullback of last spring offers some lessons.
“We compare the current experience to the April to June 2017 correction,” the analyst said in an update to clients Wednesday. “In particular, we note that last year the average stock was down 30% (median down 37%) during the 57 days between the peak and the sector trough. While there are other factors at play (there are more companies and money ‘in the system’ now, recreational sales are now only six months away with several supply agreements announced vs more than a year still remaining), the fact that the average stock is down 35% (median down 36%) in the 49 days since the sector peaked suggests to us that we are likely much closer to the end of this pullback than the beginning. Accordingly, we recommend investors consider becoming more constructive in the sector.”
Ajamian says one stock he thinks investors should be looking at is Village Farms (TSX:VFF) because he believes it has a major catalyst in the form of licensing is imminent.
In the medium-term, the analyst says he expects a “broad based” run up in the sector in the months preceding the beginning of recreational sales in Canada, which he now expects will happen in July or August. The analyst says he thinks the sectors “torquiest” name is Cronos Group (TSX:MJN, Nasdaq:CRON), which recently became the first marijuana stock to list on the Nasdaq and one he thinks could benefit from an anticipated shift in focus to U.S. operators.
In the longer term, Ajamian says he has concerns for the sector around supply, but thinks certain winners will emerge from this adversity.
“Particularly given the plethora of recent greenhouse announcements, we are becoming increasingly concerned about the quantity of planned supply. While not all of these plans may ever be fully realized, and they will not affect supply initially, there is the potential for pricing to come under pressure a few years down the road. In such an environment, we believe firms will have to pick a niche and excel at it to be successful, while companies ‘in the middle’ may be disproportionately squeezed. On the low cost end of the spectrum, we highlight Village Farms, Sunniva and Aphria Inc. On the other end (premium pricing, distribution and global reach), we highlight The Supreme Cannabis Company Inc., MedReleaf Corp., Canopy Growth Inc., Cronos and CannTrust. Hydropothecary is in the rare position of successfully straddling both the ‘low cost’ and ‘premium product’ niches.”