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Cannabis Watch

Oct. 17, 2019, 8:40 a.m. EDT

Cannabis sector falls as Aphria surrenders gains, Aurora tipped to be long-term winner

Aurora Cannabis could be 1 of 3 major cannabis companies in a decade if it survives its current challenges, says investor site

By Ciara Linnane, MarketWatch


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Aphria Inc., was skidding nearly 8% Wednesday to pace decliners in the cannabis sector, a day after it reported earnings for its fiscal first quarter that showed a profit that was mostly due to paper gains.

The stock (NYS:APHA)   (TSE:CA:APHA)  surrendered part of Tuesday’s 24% gain even as analysts weighing in on the numbers took a bullish stance. Aphria posted net income of C$16.4 million on sales of C$126.1 million, but the profit came from a change in the value of its convertible debt after a steep decline in its share price, among other factors, which is down 66% in the last 12 months.

A change in the accounting methods used to value its investment in Althea Group Holdings Ltd., allowed management to book a profit of C$24.3 million, as MarketWatch’s Max A. Cherney reported.

GMP analyst Justin Keywood reiterated his buy rating on Aphria stock on the news and said it remains on GMP’s Best Ideas list.

See also: Hexo revenue warning slams cannabis sector as stock tumbles 24%

“Given the recent broader sector correction and indications of industry transition pain, we view Aphria’s Q1 results as solid,” he wrote in a note to clients. “The results are also consistent with our recent scuttlebutt, including that Aphria has greatly improved in how it operates, along with good customer pull-through for its brands.”

Don’t miss: Marijuana stocks, after declines of over 50%, are now only ludicrously overpriced

Aurora Cannabis (NYS:ACB)   (TSE:CA:ACB)  stock fell 2.7%, even after it was tipped to be a possible long-term winner as one of three major cannabis companies expected to be still standing at the end of the next decade. The investor site, The Motley Fool , said if Aurora can survive its current financial challenges and structural problems in the Canadian market, it may end up with Constellation Brands (NYS:STZ)  and Altria (NYS:MO)  in that category.

See: Aurora Cannabis earnings: When does pot profit actually arrive?

Aurora has not sold a stake in itself to a big beverages or tobacco company, as rival Canopy Growth has (to Constellation Brands) and Cronos has (to Altria). If it can withstand pressures that include the pending maturity of convertible bonds that will be hard to service, a stock price that has fallen 66% in the last 12 months and a weakened balance sheet, the company could be among the list of three, said the site, which expects Constellation and Altria to fully take over their partners over time.

Read: Sundial sued in U.S. for failing to disclose half-ton of cannabis was returned by client

Flowr Corp.’s U.S.-listed stock (OTC:FLWPF)   (TSX:CA:FLWR)  rose 3.9% after MKM Partners analyst Bill Kirk initiated coverage with a buy rating and C$4.00 price target that is about double its current price. Kirk said the company stands out from the Canadian crowd thanks to its focus on Europe.

“We believe growing at an EU GMP certified facility in Portugal (expected before year-end) will put Flowr at an advantage to those trying to export from Canada to Europe, and even the growers in South America,” Kirk wrote in a note to clients.

Portugal offers a better climate for cannabis growing than Canada, and has a cheaper labor force and lower transportation costs, he wrote. The analyst estimates that Toronto-based Flowr can save 50% of costs by operating in Portugal and possibly even achieve parity with growers in Columbia.

“This should give Flowr a distinct advantage to capture share in the EU, which presents an opportunity more than 10x the size of Canada. Within Canada, Flowr is focused on high-end product, which offers a non-commoditized niche opportunity,” said Kirk.

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Cronos Group stock (NAS:CRON)   (TSE:CA:CRON)  was down 1.4%. The company said earlier its Cronos Australia joint venture with NewSouthern Capital Pty Ltd. is planning to go public in November. The venture will offer 40 million shares priced at AUD$0.50 ($0.34) a share. Once the deal has been completed, Cronos will own a 31% stake in Cronos Australia, which is expected to have an initial market capitalization of AUD$64.4 million.

Hexo shares (NYS:HEXO)  were down 1%, after it announced plans for a value cannabis brand called Original Stash, that it said will be priced at “black market prices.” The move is a shift away from Hexo’s original strategy which was to specialize in premium product at premium prices, according to a 2016 investor deck viewed by MarketWatch.

See: Cannabis stocks slammed as MedMen abandons deal and Aleafia drops Aphria as supplier

The company said adult-use consumers can buy 28 grams, or one ounce, of Original flash dried flower for C$125.70 ($95.11) including taxes, or the equivalent of C$4.49 a gram.

“Our aim with Original Stash is to disrupt the illicit market, educate consumers about the value of a regulated and tested product, and drive them to purchase their cannabis legally,” said Hexo Chief Executive Sebastien St-Louis.

Just last week, Statistics Canada released crowdsourced price data for the black and legal markets that found an average legal price in the third quarter of C$10.23 a gram, almost double the black market average price of C$5.59 a gram. That price differential has kept the black market strong and hampered the development of the legal market in Canada and the U.S. states that have legalized.

Valens GroWorks stock (OTC:VGWCF)  was up 2.2%, after the company posted third-quarter earnings that showed net income of C$5.9 million on revenue of C$16.5 million.

Aleafia (OTC:ALEAF)   (TSE:CA:ALEF)  was up 0.3%, (NAS:OGI)  was down 0.6% and KushCo (OTC:KSHB)  was up 0.7%. Akerna (NAS:KERN)  was down 1.5%, Green Thumb Industries was down 1.1% and Green Organic Dutchman was down 4.5%.

The ETFMG Alternative Harvest ETF (PSE:MJ)  was down 1.1%, while the Horizons Marijuana Life Sciences ETF (TSE:CA:HMMJ)  was down 1.7%.

The S&P 500 (S&P:SPX) was down 0.2% and the Dow Jones Industrial Average (DOW:DJIA) was flat.

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