The marijuana industry is growing at a blistering pace, and it’s led to rapid appreciation in most marijuana stocks. With the exception of the fourth quarter, pot stocks have been mostly unstoppable since the beginning of 2016. In January alone, 15 marijuana stocks rose by no less than 50%.
The impetus for this rally is the legalization of recreational cannabis in Canada this past October; ongoing state-level legalizations in the U.S.; a growing expectation that Mexico may give the OK to adult-use weed in 2019; and the passage of the Farm Bill in December, which gives the green light to hemp and hemp-based cannabidiol products in the United States…
These marijuana stocks just received the dreaded sell rating
But despite lofty sales growth targets for the pot industry, we as investors have seen this act play out before, and we know that not every company within a rapidly growing industry can be a winner. Earlier this week, investment bank Jefferies initiated coverage on nine pot stocks, anointing five with a buy recommendation and two with a hold recommendation, and giving two more the dreaded sell recommendation.
What’s particularly notable about these sell recommendations is that Jefferies doesn’t just see modest downside possible. Owen Bennett, the covering analyst, is modeling a target price that’s at least 25% lower than where these two pot stocks closed on Tuesday, Feb. 26. Let’s dig a bit deeper into these two marijuana stocks that Jefferies doesn’t care for.
Cronos Group: $12.93 target price, representing potential downside of 40%
This target price might come as a bit of a shock given that Cronos Group (NASDAQ:CRON) is a Wall Street darling. The bulk of its recent gains have come since December, when tobacco giant Altria (NYSE:MO) announced that it’d be taking a $1.8 billion equity stake in the company, which has yet to close. When it does close, Altria will own approximately 45% of Cronos Group, with warrants being issued giving it the option of upping its stake to 55%. Needless to say, between product development opportunities with Altria (e.g., vape products) and the growing possibility of an outright buyout, investors in Cronos are clearly excited.
But there are a number of reasons to temper that enthusiasm, as evidenced by Jefferies’ target price of less than $13 per share. To begin with…
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