Roughly one year ago, marijuana stocks could do little wrong. With Canada officially legalizing the sale of recreational marijuana and opening its doors to consumers on Oct. 17, 2018, the sky seemed to be the limit for pot stocks. But a lot can change in a year.
In recent quarters, marijuana stocks have had the veritable kitchen sink thrown at them. In Canada, regulatory-based supply constraints have kept product off of dispensary shelves. Meanwhile…
in the United States, high tax rates have ensured that legal marijuana is incapable of competing with black market pot on price. This has led to a disappointing ramp up in North American weed sales, and tumbling cannabis stock share prices as the end result.
Although we’ve seen Wall Street tone down its optimism on the most front-and-center cannabis stocks, some lesser-followed and beaten-down names still offer Wall Street consensus price targets that are at least three times higher than their current share price. Can the following three cannabis stocks triple, as Wall Street predicts? Let’s find out.
KushCo Holdings: Implied upside of 227%
As a marijuana industry ancillary player, you’d think that KushCo Holdings (OTC:KSHB) would be holding up better than companies with direct exposure to marijuana, but that’s not been the case. Shares of the company have lost close to 60% of their value since early August, with vape-related health concerns responsible for much of the damage.
KushCo does a lot behind the scenes for the cannabis industry, but it’s generating the bulk of its revenue for the time being from the sale of vaporizers. The company was already contending with higher costs associated with these vaporizers since they’re often manufactured in China. Tariffs associated with the U.S.-China trade war have adversely impacted KushCo’s margins and coerced it to raise its prices. Now, it’s also dealing with the fact that vaping has led to 1,888 cases of proven or probable mystery lung illnesses in 49 states, as well as 37 deaths, according to the Centers for Disease Control and Prevention (CDC). Though it remains unclear what’s causing these lung illnesses, the CDC has recommended that consumers not vape tetrahydrocannabinol (THC)-containing liquid (THC is the cannabinoid that gets users high). In short, it’s a real threat to U.S. vaporizer growth.
KushCo also won little support after pricing a $30.2 million share offering well below where the company’s stock had closed the day prior. Financing in the U.S. cannabis space is challenging given that banks mostly avoid the industry, forcing many companies, like KushCo, to finance their operations with dilutive share offerings.
Over the longer-term, though, Wall Street’s $6.50 price target might be reasonable. KushCo does have a burgeoning packaging and branding solutions business, and is a go-to middleman as a supplier of hydrocarbon gases, which are used in the production of cannabis oils. With the company recently sticking by its full-year sales forecast, albeit likely to lose money into 2021, KushCo has a shot of eventually meeting Wall Street’s lofty price target.
Sundial Growers: Implied upside of 282%
Another cannabis stock with some very lofty expectations to live up to is Alberta-based Sundial Growers (NASDAQ:SNDL). Wall Street is looking for Sundial to eventually top $12 per share, giving it upside of 282%, assuming that analysts are correct.
How has Sundial fallen so far away from its price target? Part of the answer can be traced to the aforementioned issues impacting Canadian growers. More specifically, a number of growers have struggled to get their product into dispensaries because of the slow rollout of physical dispensaries in highly populated provinces. In Ontario, for example, there’s one open dispensary for every 604,200 people. This slow rollout has encouraged consumers to stick with black market producers, and it’s slashed the near-term outlook for Canadian pot stocks like Sundial.
Sundial has also taken heat over a barrage of class action lawsuits. Though the company suggests the lawsuits have no merit, the lawsuits allege that Zenabis Global returned a half-ton of cannabis to Sundial because of impurities and visible mold. For its part Sundial notes that only a fraction of its 554-kilo order was returned. Nevertheless, trust is a serious issue with pot stocks at present, and Sundial’s reputation appears bruised by these allegations.
But can Sundial live up to its $12-plus price target? Despite being incredibly cheap, my initial inclination is no, and it has to do with Sundial’s primary buyer right now: other growers. While Sundial does have the potential to produce 95,000 kilos a year at its peak, most of its buyers aren’t provinces, but rather other growers at wholesale prices. That market could dry up over the next couple of years, and it’s not nearly as lucrative from a margin perspective as selling directly to Canada’s provinces. In other words, Sundial has “watch and wait” written all over it…
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