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From leading ancillary cannabis businesses to large scale Canadian Licensed Producers (LPs), broker-dealers continue to send bearish indicators to the market by lowering price targets on the companies they cover, respectively.
Although Canopy Growth Corporation (TSX: WEED) (Nasdaq: CGC) and Aurora Cannabis (TSX: ACB) (Nasdaq: ACB) have been the subject of several articles that we have published on the topic, Scotts Miracle-Gro Co. (NYSE: SMG) has also been heavily affected by this trend.
After the market closed on Monday (February 7th), Canopy Growth, Aurora Cannabis and Scotts Miracle-Gro, received additional price target cuts and we believe that our readers should be aware of the development.
MKM Partners lowered its price target on Canopy Growth and Aurora Cannabis from C$28 to C$17 and from C$8 to C$6, respectively. During the last quarter, several broker-dealers have lowered their price targets on the two Canadian LPs and this is a trend that we continue to closely follow.
From a Percentage Standpoint, the Size of Price Target Cuts is Rising
Canopy Growth and Aurora Cannabis’ new price targets from MKM Partners are approx. 40% and 20% lower, respectively, than the previously issued price target by the broker-dealer and we find the size of the cut to be significant.
In early February, Scotts Miracle-Gro released first quarter financial results and broker-dealers did not respond favorably to the numbers. After the earnings report, several high-profile Wall Street banks responded by lowering its price target on the ancillary cannabis company.
Barclays jumped on the lower price target bandwagon for Scotts Miracle-Gro and issued the business a $165 target. When compared to the new price targets issued to Canopy Growth and Aurora Cannabis, the size of cut on the ancillary cannabis company is much smaller (approx. 13%) and we consider this to be significant.
Barclays is the fourth broker-dealer to lower its price target on Scotts Miracle-Gro since the earnings report and we believe our readers should be aware of this. After publishing quarterly earnings, CFRA was the only firm to upgrade the ancillary cannabis company and changed its rating to Buy from Hold.
A Sector with Bearish Indicators
During the last year, the landscape of the global cannabis industry has recorded major changes. When compared to prior years, the capital markets has all but dried up for cannabis companies and we consider this to be a bearish trend.
Another major shift on the capital markets side of the cannabis industry is related to the type of capital that is being raised by companies. In the early years of the industry, companies were selling equity to raise capital.
Last year, we noticed a substantial increase in the number of companies (both ancillary and plant touching) that raised debt capital. There are major differences between debt and equity capital and consider the shift in the trend to be a bearish indicator.
By raising debt capital, companies are required to pay back the loan as well as the interest generated by it. Many operators have been forced to pay the principal and interest from the debt through the issuance of stock which can be very dilutive to existing shareholders.
Innovative Industrial Properties Inc. (NYSE: IIPR) canceled plans to raise $300 million through a convertible debenture. The management said it canceled the raise due to the current market environment and we found this to be surprising. Since 2021, the cannabis real estate company has raised large amounts of capital and has been able to access the capital markets when needed. For this reason, we were surprised to see the raise canceled and will monitor this trend for Innovative Industrial Properties on a going forward basis.
Although demand for cannabis in North America and abroad has been steadily increasing, the sector has been under considerable pressure. We continue to have a long-term bullish view on the burgeoning global cannabis opportunity and will keep an eye on how the industry evolves in 2022 and beyond.
If you are interested in learning more about the landscape of the global cannabis industry, please send an email to support@technical420.com with the subject “Cannabis: A Global Opportunity” to be added to our distribution list.
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