So far, 11 U.S. states (and the District of Columbia) have legalized recreational cannabis use. It’s clear that momentum is building for more to join the club — particularly after New York’s governor pegged it last week as a major legislative goal for his state this year.
This didn’t necessarily infuse the world of marijuana stocks with optimism, though. In fact, during the same week, two investment banks weighed in with downbeat opinions on one of the top companies in the sector.
2020 is fixing to be an eventful year for marijuana stocks. Here’s a look at these two recent developments.
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If New York Governor Andrew Cuomo gets his way, the U.S. cannabis industry will gain a major new market.
In his annual State of the State address last week, he said his administration intends to legalize recreational cannabis use. Sanctioning this form of sale and consumption would help correct injustices in the state — New Yorkers of color, Cuomo said, have historically been victims of “unequal enforcement” of cannabis laws.
He added that tax from cannabis products could also bring in much-needed revenue for the state, which — not for the first time — is in front of what could be significant budget deficits.
It’s encouraging that a state as large and high-profile as New York might be the next adult-use domino to fall. Yet at this early stage, it’s hard to determine how we as stock investors might be able to profit from it. What we can surmise is that every major cannabis business worth its buds will try to get involved in some way.
There are a few companies that have a bit of a leg up. MedMen Enterprises runs a handful of medical cannabis dispensaries scattered throughout the big state. MedMen, however, remains primarily a West Coast retail operator, and its recent struggles don’t bode all that well for future expansion.
New York is still far from freeing its recreational cannabis market. This new step, however, is encouraging. It indicates that despite previous failed efforts at legalization, the will and determination is there at the highest governmental levels. All marijuana stock investors, particularly those with shares of companies with a presence in the state like MedMen, should watch developments closely.
Aurora ambushed by the bears
Aurora Cannabis (NYSE:ACB) had a week to forget. The company was the target of not one, but two critical analyst notes. And you thought your New Year’s hangover was bad.
One was an update from Piper Sandler which slid its recommendation down one peg to underweight (sell, in other words) from the previous neutral, or hold. It also cut its price target to the bone, at $1, quite some distance below the former $3. An increasingly ugly balance sheet and an anticipated one year — at least — of negative cash flow are only two of the reasons for Piper Sandler’s new opinion.
Bank of America went in a similar direction, moving Aurora stock from the equivalent of neutral to sell. Similarly, it set the stock’s price target at $1. BofA’s analysis also focuses on the awful state of the company’s finances, which will probably be exacerbated by a series of writedowns the investment bank is predicting.
Does any of this sound familiar, Aurora stock followers? It should; less than a month ago, GLJ Research initiated coverage on the stock with a sell rating at the lowest possible price — $0 per share. GLJ indicated similar concerns to its peers, in addition to pointing out that the company might soon not be able to float meaningful stock issues in order to help the finances.
All of these points, in my view, are valid. Aurora is a poster child for the struggles of the cannabis industry. The company continues to burn through cash rapidly, leading to dark questions as to whether it even has the means to survive. No wonder those new price targets are so low.