This Marijuana Top Pick Just Earned a Downgrade

There’s arguably no industry that’s generating more buzz right now than cannabis.

As legalizations have taken place in Canada, throughout multiple U.S. states, and around the world, we’ve witnessed the budding potential of this industry, with Arcview Market Research and BDS Analytics citing $12.2 billion in global sales in 2018. Considering that tens of billions of dollars are being sold annually in the global black market, the opportunity is ripe for these sales to be gradually moved to legal channels as more countries roll out the red carpet for cannabis. If this happens, opportunistic pot stock investors who stay the course could walk away with a lot of green.

But as is often the case with any nascent industry that faces high expectations, hiccups are prevalent. In Canada, we’ve witnessed persistent supply shortages wreak havoc on the operating results of most marijuana stocks. And while Wall Street has mostly been forgiving of these weaker results, that’s not always the case…

This cannabis industry “top pick” just had its rating and price target cut

Last week, Quebec-based HEXO (NYSEMKT:HEXO) reported its fiscal third-quarter operating results. The company wound up generating around 13 million Canadian dollars in sales (about $9.8 million), which was far and away more than it sold in cannabis at this time last year, but was actually down 3% from the second quarter. HEXO also wound up losing about CA$17.6 million on an operating basis if one-time gains from the fair-value adjustments on biological assets were taken out of the equation.

While these results were mostly disappointing, they weren’t unexpected given Canada’s supply-chain problems. However, that didn’t stop one investment firm from downgrading HEXO.

Shortly after dishing on its third-quarter results, CIBC analyst John Zamparo downgraded HEXO to a rating of neutral from outperform, while also lowering his price target on the company by more than 10%, to CA$8.50 ($6.34) from CA$9.50. The reason? Despite HEXO forecasting CA$400 million in sales in fiscal 2020, Zamparo sees risks in the company’s plan to launch a host of derivative products. That makes Zamparo and CIBC considerably more cautious on the company.

Of course, keep in mind that analyst ratings and price targets can differ greatly — especially in a nascent industry like legal cannabis. Christopher Carey at Bank of America continues to tout HEXO as his firm’s top pick in the space, with a $10 price target on the shares. Even after its weaker-than-expected third-quarter results, B of A has stood by its longer-term outlook on HEXO.

Which investment bank is right?

The surprising answer is that they both might be correct…

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