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Aphria and Tilray Are Set To Benefit In A Major Way From The Rapidly Evolving Regulatory Framework In The United States

Mar 8, 2021 • 7:17 AM EST
4 MIN READ  •  By Michael Berger
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In any emerging market, one of the best ways to assess the progress of a new industry is through Wall Street analyst coverage. The cannabis sector is a prime example as we have seen a steady increase in the number of banks that are covering the industry.

Although a majority of the banks that are covering the cannabis sector are based in Canada, we have seen a shift with US Wall Street banks, and this is a trend that our readers need to be aware of.

The reason why Canadian cannabis companies have more coverage than US cannabis companies is on account of the Federal regulations that oversee the market. Medical and recreational cannabis are both legal at the Federal level in Canada and that has made it easier for companies to operate.

Over the next year, we expect to see a massive increase in the number of US Wall Street firms that will be covering the cannabis sector. The catalyst that is needed for this to happen will be the decriminalization or legalization of cannabis at the Federal level in the US.

2021 has been a strong year for the cannabis industry which has benefited from an expected change in regulation. With Democrats having control of the House of Representatives and the Senate, it will be much easier to pass legislation that has bipartisan support. During the last decade, there has been a massive shift in how cannabis is viewed by conservatives and the industry is one of the few to have bipartisan support.

After Joe Biden was reported to have won the 2020 presidential election, cannabis stocks started to surge higher and this caught the attention of mainstream financial media companies. Many media companies started to refer to cannabis as the real winner of the November general election and we are bullish on the direction the industry is heading.

One trend that we found to be noteworthy following President Biden’s victory is related to Canadian cannabis stocks. Although the sector has come off its highs, we find the trend to be of significance and will continue to closely follow the Canadian market.

Today, we have highlighted 3 Canadian Licensed Producers (LPs) that benefited from the November general election and have provided a breakdown that explains how banks responded to the trend.

Aphria-Tilray

A few weeks after the 2020 general election, Aphria Inc. (APHA.TO) (APHA) and Tilray Inc. (TLRY) shocked the market and announced a mega-merger. The combined company is positioned to be a leader in Canada’s recreational cannabis market as well as in the international medical cannabis market.

Broker-dealers responded favorably to the transaction and several large firms changed their ratings and price targets on both operators. Since Tilray is going to be the surviving entity of the merger, we find the changes from broker-dealers on Tilray to be of the most significance.

So far this year, Tilray has rallied more than 200% and the stock has gone from approx. $9 to almost $27. In January, the Canadian cannabis company received several price target hikes and positive rating changes. At one point in February, Tilray was trading north of the $60 level and at very overbought levels.

Following this jump, broker-dealers started to lower their rating on Tilray to Hold as the stock has continued to trade well above the price target that was issued by each bank that covers it. At current levels, we find the risk-reward profile to be mixed and will continue to closely monitor price movements from here.

Going forward, we expect the market to be highly focused on how the companies integrate, find synergies, and capture additional market share in Canada as well as in strategic international markets including the European Union (EU) and the US.

HEXO Corporation – Zenabis

When compared to the merger of Aphria and Tilray, HEXO Corporation’s (HEXO.TO) (HEXO) acquisition of Zenabis is much less attractive. HEXO does not have the best track record for making accretive acquisitions and we hope the Zenabis transaction proves to be beneficial for the business.

So far this year, HEXO has been a strong performer and has rallied more than 80%. The stock has come well off its high from February (traded above the $10 level) and momentum has been trending to the downside.

At current levels, HEXO is trading near the price targets that have been issued by leading broker-dealers. The market is highly focused on HEXO’s relationship with Molson Coors (TAP) and expects the cannabis beverage vertical to be a core pillar of the business. We are favorable on the infrastructure that Molson Coors provides HEXO and will monitor the trend from here.

Aurora Cannabis – Reliva

When compared to Tilray and HEXO, Aurora Cannabis (ACB.TO) (ACB) has been executing on a differentiated growth strategy. Last year, the Canadian cannabis company announced a major shakeup of the management team after it acquired Reliva (which refers to itself as the largest CBD brand in the US).

Prior to the transaction being announced, we did not know of Reliva’s existence. We pride ourselves on our knowledge of the sector so we found the lack of awareness to be concerning.

Aurora Cannabis has also benefited from the recent trend and we will continue to monitor the operator. The company is trading above several price targets that were issued by broker-dealers and we continue to be cautiously optimistic with Aurora.

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Authored By

Michael Berger

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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