CIBC Outlines Next Steps in Cannabis Investing

Cannabis investments are set to get hyper-focused, says a new report from a big Canadian bank.

In a note issued to investors last Thursday (March 12), John Zamparo, an analyst with CIBC Capital Markets and a tough critic of the cannabis space, indicated that after evaluating balance sheets, cash burn rates and available liquidity he is suggesting very specific cannabis companies.

The analyst said Cronos Group (NASDAQ:CRON,TSX:CRON) and Canopy Rivers (TSX:RIV,OTC Pink:CNPOF) are “the most ideal names to own in the current environment.” He added that Canopy Growth’s (NYSE:CGC,TSX:WEED) status as the leading company in the Canadian industry will maintain investor attention.

“We believe focus among cannabis investors has shifted to minimizing downside; in other words, evaluating cannabis stocks from a liquidation perspective, simply comparing market capitalization to net cash balances,” Zamparo wrote in his note.

On the other side of the market, Zamparo highlighted HEXO (NYSE:HEXO,TSX:HEXO), Sundial Growers (NASDAQ:SNDL) and Aurora Cannabis (NYSE:ACB,TSX:ACB) as companies on the verge of continued pressure “as scrutiny increases on producers who have assumed debt or utilized convertible debentures for financing.”

The analyst is not optimistic about the short-term outlook for the cannabis capital markets. According to Zamparo, quality names in the space that are producing profits are still expected to trade between 10 and 30 percent below averages seen just months ago.

Based on this projection, the analyst sees the cannabis capital markets getting less attention than they did during the second half of last year.

While cannabis names have faced increased scrutiny from investors, there is also now the coronavirus effect to consider. Canadian cannabis investments face a particular threat when it comes to the effects of COVID-19 in the midst of a significant impact to the global capital markets.

In 2019, the marijuana industry suffered a dramatic drop off from the previous rush status attached to the space. During the year, the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ), which holds a basket of the biggest names in the cannabis public markets, suffered a drop of 44.04 percent.

Zamparo went as far as to speculate that the current and projected landscape for investments will lead to the shutdown of cannabis companies, a move that he sees as ultimately “necessary” for the industry.

In the event that investors are feeling worried about putting money into the sector at all, Zamparo stressed attention to “a hyper-focus on balance sheet strength,” which in his view should help in the long run against potential downturns in the space.

What about the US market, which continues to expand and offers a counterbalance in enthusiasm to the Canadian names available? In the CIBC note, Zamparo wrote:

“We continue to view US operations (or at the very least, optionality) as an important asset, but with investors in sell-mode, it is critical to examine what potential floor values are in the cannabis universe.”

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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.