Cannabis stocks were mostly lower Tuesday, weighed down by weakness in the broader market after U.S. officials said tariffs on imported goods from China could be raised by the end of the week.
“The cannabis market is highly correlated to the overall equity market at this point,’ said Korey Bauer, portfolio manager of the Cannabis Growth CANNX, +0.10% mutual fund recently launched by Foothill Capital Management. “As the market matures, they will trade similarly to health care or consumer staples.”
Canopy Growth Corp. shares CGC, -2.28% WEED, -1.90% were down 1.8%, as investors continued to digest the news from Monday that an activist hedge fund plans to vote against a key deal aimed at securing Canopy a foothold in the U.S.
Marcato Capital Management LP said it opposes Canopy’s plan to acquire multi-state operator Acreage Holdings Inc. for $3.4 billion as soon as cannabis is fully legal in the U.S. In an open letter to Acreage’s board, Marcato said the deal undervalues Acreage based solely on the present value of its future cash flows and argued that it would fetch a far higher price once federal restrictions are lifted.
“Marcato believes it is highly imprudent for Acreage to sell itself today at the proposed valuation, with so much unlocked growth and value embedded in the company,” said the letter.
Acreage shares ACRGF, -3.12% are now lower than where they were the before the announcement, while Canopy’s shares have zoomed higher, said the letter.
Bauer said the deal makes sense for both companies. For Canopy, it secures them access to what will be the world’s biggest cannabis market, while for Acreage, it gives them a tie to the biggest company in the sector, with a strong management team and a healthy war chest, courtesy of the $4 billion investment by Corona beer maker Constellation Brands Inc.
“Acreage is not just looking at the U.S. but the global market, so linking up with Canopy gives them a global footprint,” he said. “Canopy is being very aggressive in expanding and that’s the right move at this point. The faster you expand, the harder it will be for competitors to catch up. For now, Canopy is the market leader.”
Acreage shares were down 5.7%.
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GW Pharma shares rose 2.2%, after the company posted better-than-expected earnings and announced positive results in a late-stage trial of its Epidiolex drug for another condition that causes seizures. Epidilolex is the first cannabis-based drug to win approval from the U.S. Food and Drug Administration as a treatment for severe forms of childhood epilepsy. The drug is now being tested as a treatment for patients with seizures associated with tuberous sclerosis complex, or TSC.
Oppenheimer upgraded the stock to outperform from perform on the news.
“While we await detailed data that may be shared at a medical conference, we update our probability of approval of the sNDA for TSC to 87% from 41% (filing expected in 4Q), and move to an Outperform rating and a price target of $234 (vs. $162),” Oppenheimer analyst Esther Rajavelu wrote in a note to clients. “We also like management’s efforts to broaden the pipeline with open label studies of CBDV for autism spectrum disorder and Rett Syndrome which may contribute to a diversified portfolio.”
Stifel analysts led by Paul Matteis raised their GW Phamra stock price target to $227 from $191 and said dinner with GW management after the earnings report “reaffirms our view that the Epidiolex launch to date, considering all of the variables that have led the product to beat consensus, is going about as well as one could’ve hoped.”
Matteis is also expecting the drug to be approved for TSC in 2019. The analyst raised his revenue forecast for Epidiolex for the second quarter to $49 million from $26 million.
GrowGeneration Corp. shares soared 7.4% after the Denver-based maker of specialty hydroponic and organic garden centers posted earnings for the first quarter. The company, which has operations in eight states that have legalized cannabis for medical or recreational use, said it swung to a net profit of $229,421 in the quarter from a loss of $953,430 in the year- earlier period. Revenue rose to $13.1 million from $4.4 million.
Like many companies in the cannabis sector, GrowGeneration does not have reliable FactSet consensus numbers. Same-store sales rose 42%.
“With our significant top and bottom-line growth, we were able to reduce our operating expenses by 26% and our corporate overhead by over 100 % as a percentage of our revenue,” Chief Executive and co-Founder Darren Lampert said in a statement.
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Elsewhere in the sector, Aleafia Health Inc. ALEF, +6.79% ALEF, +6.79% shares rose another 4.6%, extending their prior-day gains made on news of a joint venture in Germany.
“That stock has been beaten down lately, after it announced the acquisition of Emblem, so it was due for a bounce,” said Bauer. “It’s a really international name with a big market share of medical cannabis in Canada and it’s being aggressive with overseas expansion. If you’re Canadian and you’re not expanding somewhere else, you’re getting behind the curve.”
Cronos Group Inc. shares CRON, -3.98% CRON, -2.79% were down 4.1% and Tilray Inc. TLRY, -3.16% was down 2.6%.
Green Organic Dutchman Holdings Ltd. TGOD, -0.69% TGOD, -0.69% was down 0.9%, medical cannabis retailer MedMen Enterprises Inc. shares MMNFF, -1.92% were down 2.1% and Aphria Inc. APHA, -1.91% APHA, -1.62% was down 1.6%. Valens GroWorks Corp. VGWCF, -3.74% was down 3.5%.
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The Horizons Marijuana Life Sciences ETF HMMJ, -1.37% was down 1.1%, and the ETFMG Alternative Harvest ETF MJ, -1.36% was down 1.3%.
Meanwhile, the Dow Jones Industrial Average DJIA, -1.65% was down 407 points, or 1.5%, while the S&P 500 index SPX, -1.65% was down 1.6%.
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