Have marijuana stocks come too far too fast, ahead of legalization?

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With less than a year to go until the target date for the legalization of recreational pot, share prices of Canadian marijuana companies have been on a tear. But a note Wednesday from Canaccord Genuity suggests some may have come too far too fast.

While Canaccord upped its odds that Canada will actually legalize recreational marijuana by next year, to 90 per cent from 80 per cent, it also downgraded industry leader Canopy Growth Corp. to sell from hold, due to the stock’s skyrocketing valuation.

Shares of Canada’s largest licensed marijuana producer have increased more than 30 per cent over the past month. They closed at at $13.07 Thursday, down 3.83 per cent for the day.

“We believe the new provincial frameworks have been beneficial for Canopy, providing clarity into the roll out of a market where the company is best positioned,” analysts Neil Maruoka and Matt Bottomley said Wednesday in a research note. “However, we expect that there also remain significant barriers, as the provinces will likely seek to capture some or all the retail margin.”

The Canadian Marijuana Index, which includes 18 of the country’s biggest cannabis stocks, has shot up about 26 per cent since the Ontario government announced last month it intends to sell recreational pot online and in 40 brick-and-mortar stores by the federal government’s target legalization date of July 2018.

“Markets have clearly taken this news as positive,” Canaccord said of Ontario’s plan.

Canaccord said they see Canopy emerging “as one of the dominant players” in the Canadian cannabis industry and raised their target price to $11 from $9.50, despite the downgrade.

“With rec legislation likely on track to be passed before year-end, we now have greater certainty that the federal government can meet its target for a July 1, 2018 roll out of the rec market in Canada,” they said. “Further, as the individual provinces introduce their rec frameworks, we believe that the additional clarity of retail recreational distribution suggests reduced risk for this component of our valuation.”

A recent note from Mackie Research Capital said Canadian marijuana producers in also have opportunities abroad thanks to the country’s approach to cannabis.

“Overall, we forecast strong market growth domestically and internationally, which should bode well for many of the companies operating in the industry,” wrote analyst Greg McLeish.

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Source: 420 Intel – United States

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