2021 has been a wild year for the cannabis sector and has been highlighted by extreme moves to the upside and the downside.
Although we are not even through the first quarter of the calendar year, the cannabis sector has been the subject of conversation with key members of the new White House administration and with multi-billion-dollar brands like British American Tobacco.
Surprisingly, Canadian Licensed Producers (LPs) have been some of the greatest beneficiaries of the advancement of the US cannabis market. This is a trend that caught our attention and we have been closely following the performance of certain LPs.
We have always considered Canopy Growth Corporation (WEED.TO) (CGC) to be the bellwether of the Canadian cannabis industry. The Canadian cannabis company has the strongest balance sheet in the entire industry and has attractive leverage to burgeoning international cannabis markets.
So far this year, Canopy Growth has rallied more than 40% and has broken out of its 2020 price range. A few weeks ago, the stock was trading above the $66 level and momentum was trading at overbought levels (based on the relative strength index). The stock has come sharply off its highs and momentum has been trending to the downside and is approaching oversold levels.
Although we are bullish on Canopy Growth’s long-term growth prospects, we find the recent rally to be slightly overextended. Apparently, we are not the only ones who consider Canopy Growth to be overvalued.
Canopy Growth is Issued a Double Downgrade
Yesterday, Jeffries changed its rating on Canopy Growth to Sell from Buy. Despite the downgrade, the broker-dealer raised its price target to $29.09 from $27.78 (CAD). We find the change in price target to be insignificant since Canopy Growth is trading north of the $44 level and will monitor how the market responds to the ratings change.
This morning, Eight Capital jumped on the sell Canopy Growth bandwagon and resumed coverage with a Sell rating. Prior to the broker-dealer resuming coverage, it had Canopy Growth rated as hold and we believe this is the start of a new trend. Like Jeffries, Eight Capital raised its price target on Canopy Growth to $34.50 from $23 (CAD), which is still substantially lower than the current price.
Currently, Canopy Growth is trading well above a majority of the price targets that the broker-dealer have issued it. A few weeks ago, the Canadian cannabis company received a series of price target and rating changes from leading Canadian broker-dealers.
Cowen and Company has the highest price target on the street and has issued Canopy Growth a $75 price target. Besides for Cowen, only CIBC and Alliance Global Partners have a price target that is higher than the current price and we find this to be of significance.
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