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Oct. 3, 2019, 8:51 a.m. EDT

Cannabis stocks reverse losses as report finds most Americans favor decriminalizing all drugs

Canopy sheds early losses to trade up 2.4% and Aurora Cannabis is reverses course to add 3.9%

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By Ciara Linnane, MarketWatch


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Cannabis stocks reversed their early losses to move higher in afternoon trade Wednesday, after a report found that most Americans favor decriminalizing all drugs.

The report by libertarian think tank Cato Institute found 55% of 1,700 adults polled want drug offenses to be treated like civil infractions that do not carry jail time, compared with 44% who disagree. While polls have long found Americans in favor of legalizing cannabis, support for overall drug policy has mostly been lacking, as advocacy site Marijuana Moment reported.

The report came as the broader markets were under heavy selling pressure from recession fears with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.20%  down more than 500 points and the S&P /zigman2/quotes/210599714/realtime SPX -0.16%  own 2%.

The Horizons Marijuana Life Sciences ETF shed its early losses to trade up 1.6% with 24 of its constituent stocks trading higher. The ETMFG Alternative Harvest ETF was flat. The ETFs have fallen for the last four trading sessions.

“Valuations on a select group of cannabis companies are starting to look appealing at these levels,” said Korey Bauer, portfolio manager at the Cannabis Growth mutual fund /zigman2/quotes/208282024/realtime CANNX +6.39% from Foothill Management. But investors should be “very selective” in the sector at this time, he added.

“Sentiment clearly is negative,” he said, citing the vaping-related lung disease that has sickened people across the country and the increasing difficulty in accessing capital.

“The sector is (being) driven purely by retail investors. Retail panic is creating opportunities for active managers like us,” he said.

The market was pressured early in the session by losses for the big Canadian licensed players, after an analyst said earnings expectations are unrealistic and told investors to brace for more bad news.

MKM Partners analyst Bill Kirk outlined his forecasts for when companies will report positive EBITDA, or earnings before interest, taxes, depreciation and amortization, a metric that is more of a measure of cash flow than actual profit.

Even on that basis, Kirk said he expects market leader Canopy Growth /zigman2/quotes/200603886/composite CGC +15.02%   /zigman2/quotes/202205609/delayed CA:WEED +15.07%  will not be EBITDA positive until the first quarter of 2022, a full year later than the current consensus estimate. For Aurora Cannabis /zigman2/quotes/210559470/composite ACB +18.18% /zigman2/quotes/203734337/delayed CA:ACB +18.29% , the most widely held stock, Kirk expects positive EBITDA by the first quarter of 2021, compared with the current consensus of the third quarter 2020.

For Tilray Inc. /zigman2/quotes/209129655/composite TLRY +7.22% , his forecast is the first quarter of 2022, a year later than the consensus. For Cronos /zigman2/quotes/206842762/composite CRON +10.92% /zigman2/quotes/202715342/delayed CA:CRON +10.86% , it’s the first quarter of 2023, compared with consensus for fourth quarter 2021, and for Hexo Corp. /zigman2/quotes/206508254/composite HEXO +33.68% , his date is second quarter 2020, matching the consensus.

“With Aurora warning of slower buying from provinces in July and August (warning Sept. 12), and little indication new retail locations are opening in Ontario in October, we believe the next reported quarter will not show meaningful net sales acceleration,” Kirk wrote. “Increased costs, without the hoped for sequential revenue growth, results in profitability that is likely to disappoint.”

Don’t miss: Cannabis companies are having a horrible summer as scandals mount and stocks slide

For Canadian LPs to improve profitability would require that pricing holds up, that new products due at year-end when derivatives come on line succeed and are margin-accretive, that export markets demand product grown in Canada and that brands start to resonate across regions.

Read: Canopy Growth’s remaining CEO talks about pot company’s shake-up, and the search for his replacement

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