Investors have had their eyes on the trade negotiations between the U.S. and China for a long time, and on Friday morning, they liked what they saw. Signs that a planned meeting between President Donald Trump and high-level Chinese officials would actually take place gave market participants more optimism about the prospects for at least a partial agreement between the two nations. As of just after noon EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 395 points to 26,891. The S&P 500 (SNPINDEX:^GSPC) had risen 42 points to 2,981, and the Nasdaq Composite (NASDAQINDEX:^IXIC) had gained 129 points to 8,080.
Yet even as benchmark indexes were on the rise, professional market watchers were still expressing concerns about the prospects for some specific industries — in particular, the legal cannabis space. Over the past year, prices of marijuana stocks have fallen a long way from their peaks levels. And on Friday morning, another set of influential analysts who focus on the cannabis space advised caution. Although share prices for key players like Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) didn’t have much of an immediate response, a lot will depend on how successful their business efforts are in the months to come.
Coming off a long high
Shares of Canopy Growth were trading a fraction of a percent lower following comments from analysts at Jefferies about the Canadian cannabis cultivator and its peers. Jefferies cut its rating on Canopy from buy to hold, and it reduced its price target on the stock by more than two-thirds, from 77 Canadian dollars to CA$25. In U.S. currency, that works out to about $19 per share on the New York Stock Exchange, which is below where Canopy currently trades.
Most of Jefferies’ comments applied well beyond Canopy to the entire industry. The analysts asserted that there were no immediate prospects for cannabis companies to become consistently profitable, and pointed to the impact of bad publicity on stock prices across the sector. For Aurora Cannabis, Jefferies slashed its price target in half to just CA$7, equivalent to roughly $5.30 per share. Yet that’s actually quite a bit above the $3.75 share price Aurora fetched Friday morning, up 1% from Thursday’s close.
Price target cuts for some other major operators in the cannabis space were equally harsh. Jefferies slashed its target on Tilray by more than half to $25 per share, and Cronos Group got a 33% cut to CA$10 per share, or around $7.50.
Could marijuana stocks bounce back?
Analysts did hold out hope that there would eventually be some winners for investors in the cannabis space. The companies that pay off, in their view, will be those that over the next 12 months can demonstrate that they have a pathway to profitability. To do that will require good execution along with sound strategic vision.
For Canopy, that will mean finding a new CEO who can rein in expenses like share-based compensation. At the same time, though, it will want to move aggressively to boost recognition for its name-brand products. Even though the Canadian cannabis market hasn’t taken off at the speed that many had hoped, Canopy nevertheless has a leadership position there. Finding strategies that work in Canada could be key to its success when it enters other markets in the future.
Meanwhile, Aurora has worked to emphasize value-added cannabis products that can produce better profit margins than bulk marijuana. Massive projects to boost production are also giving Aurora the prospect of creating an operation with industry-leading scale, which could help reduce costs. Ensuring that it has ongoing access to financing will be important, but Aurora is positioned better than many of its peers to take advantage of new opportunities.
If Aurora and Canopy are able to beat back their rivals and demonstrate their dominance, then they might be able to defy analysts’ negative predictions and return to their former glory. However, anything short of convincing wins in the marketplace could keep their stocks in the penalty box for a long while.