Canopy Growth and Cronos Group will “dominate” the global market, CIBC says

Canadian banks are getting behind cannabis, with the latest effort coming from CIBC, which Thursday launched coverage of the sector, issuing “Outperform” ratings to industry heavyweights Canopy Growth Corp. (Canopy Growth Stock Quote, Chart TSX:WEED, NYSE:CGC) and Cronos Group (Cronos Group Stock Quote, Chart TSX, NASDAQ:CRON).

“Investors rarely get to witness the birth of an industry,” leads the report from CIBC which goes on to say that while there will be many companies to come and go in the fast-evolving space, Canopy and Cronos should emerge as long-term winners.

“Dozens of small/medium-sized firms will likely earn moderate revenues and earnings,” writes CIBC analyst John Zamparo, “but only a handful will come to dominate the global market.”

As a group, Canada’s cannabis stocks had a good couple of runs last year, one over December 2017 and January 2018 which brought a lot of new interest into the space and then again in the months leading up to legalization this past October. Stocks have fallen off in the weeks and months since, however, although both Canopy and Cronos have been outliers to that trend. Canopy has posted impressive gains so far in 2019, while Cronos has more than doubled in value since the end of November.

Both companies have secured major deals over the past half-year which have legitimized their businesses in the eyes of investors. In September, Canopy saw alcohol giant Constellation up its stake in the cannabis company through a US$4-billion investment while in December, Cronos inked a US$1.8-billion deal with tobacco company Altria Group.

The latter deal “solidified our conviction” in Cronos, says Zamparo, arguing that the company’s emphasis on IP and distribution are distinguishing points for Cronos, while the report maintains that Canopy is “the best-capitalized in the space, with few limits on what it chooses to buy and build” and that it already has “a good head start” on operations internationally.

CIBC now joins BMO and Scotiabank who also have analyst coverage of marijuana companies, something of a graduation for the pot stocks who before the big banks became interested relied on independent investment banks such as Canaccord Genuity and GMP for underwriting and for analyst coverage.

But that situation has clearly changed, which will ultimately lead to more investor interest, says Paul Bagnell of BNN Bloomberg.

“We speak to portfolio managers almost daily who are reluctant to get into the sector,” says Bagnell on BNN Bloomberg on Friday. “They think [the cannabis sector] is too young and that we don’t yet know who the winners and losers will be, and I think one thing that those types of investors want is the type of research you get from analysts who are devoting the time to understanding the sector and making educated forecasts on its future.”

CIBC’s one-year price target for Canopy is $65.00, implying a projected return of 12.6 per cent as of late-day trading on Friday. For Cronos, it has a target of $22.00, implying a return of 10.6 per cent. CIBC also initiated coverage of Aphria with a “Neutral” rating and $10.00 price target, implying a return of 15.5 per cent.