2018 was a rocky year for most market sectors but for healthcare and, in particular, for cannabis stocks the peaks and valleys were extreme. Canadian pot co’s were flying high during the months leading up to rec cannabis legalization in October, but afterwards proved to be a different story, with all but a small handful of names managing to close out the year in positive territory.
But there are plenty of reasons to be bullish about cannabis, according to investment bankers GMP Securities, who are projecting outsized returns from the sector in 2019.
On Wednesday, GMP published its Best Ideas list for the year, which features stocks projected to return over 20 per cent, including three pot companies: Cronos Group (Cronos Group Stock Quote, Chart TSX, NASDAQ:CRON), Organigram Holdings (Organigram Stock Quote, Chart TSXV:OGI) and Curaleaf Holdings (Curaleaf Holdings Stock Quote, Chart CSE:CURA).
GMP says 2019 will be the inflection point for cannabis, first and foremost because after years of build-out and infrastructure spending, many companies will finally be making a profit, substantially de-risking the sector. As well, GMP pegs Canada’s mature market at reaching $10 billion, and with many Canadian licensed producers working to establish themselves on the international stage, the growth prospects there are huge: between $30 and $100 billion, as more and more countries relax their laws surrounding marijuana.
“The sentiment shift in favour of cannabis gained further traction throughout 2018, in our view, with many countries now actively pursuing medical programs and some that have expressed interest in full recreational legalization. We expect the movement will continue to gain support in 2019,” GMP says.
GMP analyst Martin Landry likes Cronos in 2019, referring to the December announcement of tobacco giant Altria’s taking on a 45 per cent stake in Cronos as a game changer, one that leapfrogs the company into being a global leader in the space. Cronos will leverage Altria’s expertise in all areas of the business from automation and large-scale manufacturing to marketing, product development and supply chain, says Landry.
“In our view, Cronos is second only to Canopy in terms of financial resources and execution capabilities amongst the largest cannabis companies in the world. However, the company ranks fifth in terms of EV, providing investors with the potential for a significant re-rating,” Landry says.
The analyst expects Cronos will more than quadruple its 2018 revenues in 2019, boosted by the company’s new 280,000 sq. ft. production facility in Stayner, Ontario.
Landry gives CRON a “Buy” rating and a 12-month target price of $24.00, representing a projected return of 51.9 per cent. (All target prices shown are as of publication date.)
Moncton, New Brunswick’s Organigram also makes the list, in part due to its appealing valuation — Landry estimates that the stock trades at a 50 per cent discount to the big five licensed producers and yet in on track to have production numbers in excess of 100,000 kg by the second half of 2019 — but also due to its sparkling cash cultivation costs which could push OGI’s gross margins up near 70 per cent in the rec cannabis market.
Landry rates OGI a “Buy” with an $8.50 target, representing a projected return of 47.8 per cent.
Finally, GMP analyst Robert Fagan gives the nod in the US cannabis industry to Curaleaf, pointing to the company’s relatively large operating platform.
“Despite the entry of several new large US multi- state operators (MSOs) recently to the public markets, we believe CURA still offers the largest operational production and distribution platform in the industry. Pro-forma pending acquisitions, CURA currently has 40 open dispensaries, and an operational production footprint spanning ~525,000 sq. ft. across 14 facilities. This is ~2x larger than the average of all MSO peers,” Fagan says.
At the same time, Fagan sees CURA to be trading at a heavy discount to its peers, with the peer group (comprised of Acreage Holdings, MedMen Enterprises and Green Thumb Industries) trading at about 4x turn premium to CURA.
Finally, Fagan says that whereas other US-based companies have only recently won new licenses, Curaleaf has already put in much of its heavy lifting for its platform in terms of CAPEX and OPEX.
The analyst gives CURA his “Buy” recommendation with a $20.00 target, representing a projected return of 166.7 per cent.
Additionally in the healthcare space, GMP has selected specialty pharma company HLS Therapeutics (HLS Therapeutics Stock Quote, Chart TSXV:HLS) as a Best Idea for 2019. HLS owns the Canadian rights to cardiovascular drug Vascepa, an already FDA-approved and commercialized drug in the US whose six-year drug trial recently met its primary endpoint by demonstrating a 25 per cent relative risk reduction of cardiovascular events. GMP analyst Justin Keywood estimates that Vascepa is expected to generate between $150 and $250 million at peak sales in Canada, while the company’s flagship schizophrenia drug asset Clozaril provides an economic moat and steady foundation for HLS to pursue further transactions.
Keywood gives HLS a “Buy” rating with a $21.00 target, representing a projected return of 51 per cent.