Another bottom is coming for cannabis stocks: Raymond James

Even with good news coming out of Alberta last week, the weeks and months ahead are still looking dark for Canada’s cannabis stocks.

So says Raymond James analyst Rahul Sarugaser, who on Monday delivered an update to clients on the sector, saying that upcoming earnings reports from a number of names will likely be a negative for cannabis.

The province of Alberta last Friday announced that sales of cannabis vape products would begin starting as soon as this week, as the province completed its review of the product which had been suspended earlier this year after an outbreak of vape-related illnesses in the US and Canada sparked concerns about the products.

“Government reviewed the available evidence, data and other provinces’ decisions on cannabis vaping and determined that Alberta will allow for the sale of cannabis vapes,” said Heather Holmen, communications manager for Alberta Gaming, Liquor and Cannabis, to the Calgary Herald on Sunday. “From a government perspective, it was important to review the evidence that was available and ensure that the decision was
made in the best interest of Albertans.”

The decision comes as a breath of fresh air for Canada’s pot industry which has been hampered by a slower-than-anticipated rollout of retail across the country, says Sarugaser, who pointed out that Alberta, which has just 15 per cent of Canada’s population, currently has over 400 cannabis retail stores, compared to the rest of the country, with the total number for Canada sitting at less than 800 stores.

“While we expect this news could buoy the entire Canadian cannabis sector today, it is most pertinent for companies that have established strong portfolios of vape products: Cronos Group (Cronos Group Stock Quote, Chart, News TSX:CRON) and Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI), in particular,” wrote Sarugaser.

Last week, both Tilray (Tilray Stock Quote, Chart, News Nasdaq:TLRY) and Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) announced they’d be laying off ten per cent of their respective employees as a cost-saving measure, with Aurora adding a lower-than-expected revenue guidance for its upcoming quarter.

Sarugaser says that with more pot stocks about to announce earnings, the sector could be in for more pain, with another downturn in the space likely to come, according to the analyst.

“The first bottom we saw in November and December 2019, and we predict a second bottom in February or March 2020. We anticipate a sector rebound beginning around May 2020 — motivated by Cannabis 2.0 revenues and expanded cannabis retail footprint across the country—and materializing more fully during the back half of this year,” Sarugaser wrote.

“For investors already active in the cannabis market, we would see a switch into OGI or CRON as sensible while they ride out the storm. For new cannabis investors, we recommend patience: wait until the turnaround we anticipate in May,” Sarugaser wrote.

Last year was an all-around bad one for cannabis stocks, with neither Cronos nor Organigram escaping punishment Cronos finished 2019 down 31 per cent while Oranigram lost 34 per cent of its value.

So far in 2020, CRON is down 11 per cent and OGI is down four per cent.