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Feb. 26, 2019, 6:58 a.m. EST

Cronos falls, Aurora gains after wave of pot-stock initiations

Jefferies analyst labels Aurora and Canopy the best bets to dominate cannabis sector, Cronos and Hexo get ‘sell’ ratings

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By Jeremy C. Owens, MarketWatch


Bloomberg News/Landov
Hexo Corp., which owns the greenhouse pictured above, was one of two pot companies to receive a “sell” rating in a batch of initiations from Jefferies & Co. released Monday morning.

Cannabis stocks fell overall Monday, after Jefferies & Co. jumped into the sector with initiations of nine pot producers and called Aurora Cannabis Inc. and Canopy Growth Corp. the cream of the cannabis crop.

Overall, Jefferies labeled five of the companies a buy: Aurora /zigman2/quotes/210559470/composite ACB -3.43%   /zigman2/quotes/203734337/delayed CA:ACB -3.22%  , CannTrust Holdings Inc.    , Organigram Holdings Inc. CA:OGI -0.44%  , Green Organic Dutchman Holdings Ltd. /zigman2/quotes/206870535/delayed CA:TGOD +4.35%   /zigman2/quotes/204266798/composite TGODF -2.29%   and Flowr Corp. /zigman2/quotes/205237089/composite FLWPF -0.97% . Two companies received hold ratings — Canopy /zigman2/quotes/200603886/composite CGC -3.89%   /zigman2/quotes/202205609/delayed CA:WEED -3.04%  and Emerald Health Therapeutics Inc. /zigman2/quotes/226430850/delayed CA:EMH 0.00%   — while Cronos Group Inc. /zigman2/quotes/206842762/composite CRON -2.45%   /zigman2/quotes/202715342/delayed CA:CRON -1.98%  and Hexo Corp. /zigman2/quotes/206508254/composite HEXO -2.07%   /zigman2/quotes/200008967/delayed CA:HEXO -1.53%   were labeled as “underperform,” the equivalent of a sell rating.

Bennett wrote that Aurora, which received a $12 price target, and Canopy, which was initiated with a $64 price target, are the “best placed to dominate on a global basis in the years ahead.” Canopy’s hold rating was based on his opinion that the market’s valuation “has appropriately captured this strong positioning,” but he sees room for growth in Aurora. He especially likes how the company has positioned itself to eventually enter the U.S. market, which he believes is “yet to be fully appreciated” by the market.

See also: Canopy Growth co-CEO reveals top priorities for world’s largest legal marijuana company

“The U.S. is the world’s biggest cannabis market,” Bennett wrote in a piece on the entire sector, while noting that cannabis is still federally illegal on the federal level and all pot companies can do is position themselves for a U.S. entry. “If any cannabis co. wants to claim large cap or even megacap future status, they need to have a strong position in the U.S.”

Cronos shares had the biggest move of the bunch Monday, falling more than 7%. Jefferies analyst Owen Bennett wrote that he has “not been overly impressed” with the company’s early performance in the Canadian recreational-marijuana sales market.

/zigman2/quotes/206842762/composite CRON 8.35, -0.21, -2.45%

“Flower capacity could be limiting, its main recreational brand has a questionable target audience in our view, early consumer reviews of said brand do not stand out, and little infrastructure appears to be in place for the derivative market, even with the Altria /zigman2/quotes/208895754/composite MO -1.19%  support,” Bennett wrote while giving Cronos a $17 price target. Bennett did say that Cronos is positioned well in the medical-marijuana market, especially overseas.

Bennett was harsher on Hexo, specifically calling out its deal with Molson Coors Brewing Co. /zigman2/quotes/205165133/composite TAP -3.40%  .

“We think there’s a tendency by the market, due to limited financial metrics/industry data, to take any CPG/brand partnership as a validation of a superior business; the deal Hexo signed with Molson is an example,” Bennett wrote. “The reality is Molson didn’t put any capital in, we don’t actually know if Hexo have superior patented water soluble applications to commercialize near term, no current bottling infrastructure appears in place, and we’ve no idea about their extraction capacity to supply the beverages.”

Read: How marijuana companies can profit without selling pot

The CannTrust rating arrived as the pot producer’s shares began trading Tuesday morning on the New York Stock Exchange under the symbol CTST  . Bennett said the listing “could drive attractive 12-month re-rating as more large investors become aware of the story.”

Medical-marijuana company GW Pharmaceuticals Holdings PLC  is scheduled to report quarterly earnings Tuesday. Reporting later this week are MedMen Enterprises Inc. /zigman2/quotes/201940908/composite MMNFF -6.23%  and Green Growth Brands Inc. /zigman2/quotes/204912440/composite GGBXF -7.91%  , which is making a hostile bid for Aphria Inc.  .

Overall, the sector was down in Monday trading, with the Horizons Marijuana Life Sciences /zigman2/quotes/208856346/delayed CA:HMMJ -1.82%  declining 0.9% and the ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ -2.35%  falling 1.1%.

Correction: An earlier version of this article had an inaccurate earnings date for GW Pharmaceuticals PLC due to an error from a third-party data provider. The article has been updated.

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Jeremy Owens is MarketWatch’s technology editor and San Francisco bureau chief. You can follow him on Twitter @jowens510.

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