Lions and Tigers and Bearish Cannabis Sector Price Targets O My!

During the last year, leading Canadian broker-dealers have been downgrading Canadian Licensed Producers’ (LPs) rating on average. The banks have also been lowering price targets for Canadian LPs and we consider this to be a bearish indicator. 

Although we continue to hope to see a change in trend with rating and price target that are assigned to leading Canadian and United States (US) cannabis operators, the trend has continued so far this year. 

Earlier this week, Jeffries announced several changes to the ratings and price targets that it assigned to certain Canadian LPs and we believe our readers should be aware of these changes. The two companies that were impacted by these changes are:

• HEXO Corporation (TSX: HEXO) (Nasdaq: HEXO) was upgraded to Hold from Sell and the price target was lowered to $0.53 from $1.07 (changed to C$0.67 from C$ 1.07 on the Canadian side)
• Cronos Group Inc. (TSX: CRON) (Nasdaq: CRON) was upgraded to Hold from Sell and the price target was lowered to $3.24 from $5.54 (changed to C$4.08 from C$6.98 on the Canadian side)

Are Banks Getting Bearish on Canada’s Cannabis Industry?

Jefferies is not the only company to become more bearish on the Canadian cannabis sector and Canaccord Genuity and CIBC have also been downgrading and lowering price targets on Canadian LPs. Below, we have highlighted 9 additional rating and/or price target changes that have been reported by Canadian broker-dealers since December 1, 2021: 

1. CIBC lowered its price target on Cronos Group to $5 from $7.50
2. Alliance Global Partners lowered the price target on Canopy Growth Corporation (TSX: WEED) (Nasdaq: CGC) to C$11 from C$18
3. Bank of America downgraded Canopy Growth to Underweight from Neutral and lowered the price target to C$10 from C$19
4. Alliance Global Partners lowered its price target on Organigram Holdings Inc. (TSX: OGI) (Nasdaq: OGI)  to C$2.25 from C$4
5. MKM Partners lowered the price target on HEXO to C$1 from C$8
6. ATB Capital Markets lowered the price target on HEXO to C$0.80 from C$1.50
7. CIBC lowered its price target on HEXO to C$0.80 from C$2
8. Canaccord Genuity lowered its price target on HEXO to C$1 from C$2
9. Canaccord Genuity issued Cardiol Therapeutics Inc. (TSX: CRDL) (Nasdaq: CRDL) a Buy rating and a $8 price target

During the last quarter, a limited number of cannabis companies were issued higher price targets from leading Canadian broker-dealers and this is a trend that we are closely following. Some of our key takeaways from our analysis on the rating and/or price target changes that we highlighted include:

1. On a percentage basis, the size of the price target cuts range from approx. 30% to almost 90% 
2. Canadian LPs have been the primary subject of rating and/or price target changes. We determined that companies with a focus on the biotech or retail side of the cannabis industry have been less impacted by the recent changes. 
3. Most of the companies that were downgraded have reported major changes to the management team over the last few years 
4. Smaller Canadian LPs are covered by fewer broker-dealers which has resulted in fewer rating and/or price target changes being reported
5. A few Canadian LPs are trading below the required listing price on the Nasdaq exchange and the price targets on these operators is below the listing price. We expect these companies to conduct reverse splits in order to meet the listing price requirement to trade on the exchange in the first half of the 2022

Trends to Be Aware of

When analyzing trends that are associated with rating and/or price target changes from broker-dealers, we consider the size of the price target cuts to be the most significant metric. We believe the second most important key metric pertains to Canadian LPs that may be forced to conduct a reverse split in order to meet the Nasdaq’s trading price requirement (needs to trade above $1). 

In late 2020, HEXO completed a four-for-one reverse split in order to be in compliance with the New York Stock Exchange’s (NYSE) listing regulations. After the reverse split, the company voluntarily delisted from the NYSE to trade on the Nasdaq. The Nasdaq also has listing requirements and we would not be surprised if the Canadian LP had to conduct another reverse split in order to continue to trade on it. 

Sundial Growers (Nasdaq: SNDL) is another Canadian LP that will most likely need to conduct a reverse stock split to continue to trade on the Nasdaq exchange and we will monitor how the management team is able to navigate this issue. 

Going forward, we will continue to monitor the trend and believe our readers needs to be aware of the change in perspective by leading Canadian broker-dealers. If you are interested in learning about changing price targets and ratings on leading cannabis companies, please send an email to support@technical420.com with the subject “Broker-Dealer Rating and Price Target Changes” to learn more. 

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Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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