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Cannabis stocks turn higher after Curaleaf misses revenue estimates but offers bullish outlook

‘Sentiment is very negative right now across the sector,’ says portfolio manager, after a summer of scandals and lowered estimates

Cannabis stocks turned higher Wednesday, buoyed by gains in the broader market as investors digested the latest earnings from the sector while volumes thinned ahead of the U.S. Labor Day weekend.
The Dow Jones Industrial Average DJIA, +0.16%  was last up almost 200 points, drifting higher as investors shrugged off some of the recent pressures on the market from the inverted yield curve to the China/U.S. trade tensions to the growing chances of a no-deal Brexit.
The ETFMG Alternative Harvest exchange-traded fund MJ, -1.03% was last up 1.4%, with 29 of its 38 constituent stocks moving higher. The Horizons Marijuana Life Sciences ETF HMMJ, -1.05%  was up 2.3%, with 31 of its 54 component stocks higher.
Still, “sentiment is very negative right now across the sector,” said Korey Bauer, portfolio manager of the Cannabis Growth mutual fund CANNX, -0.42%  from Foothill Management, who noted his firm’s proprietary Cannabis World Index is down 35% from its March highs. The two ETFs have fallen almost 30% in the last three months.
While valuations are starting to look more reasonable, analyst estimates are coming down across the board as Canadian companies continue to post losses almost a year after full legalization, he said.
“The sector needs a positive spark,” he said, such as the one provided last year by drinks giant Constellation Brands STZ, -0.14% $4 billion investment in Canopy Growth CGC, -2.28% WEED, -1.60% arming that company with a war chest that has helped make it the sector’s biggest player by market value.
“We think M&A will start to pick up after this significant decline,” he said. Sentiment may also find support from the rollout in Canada of cannabis derivatives, including edibles, expected in December, he said.
Valuations have been coming down across the sector through the summer, weighed down by a series of negative events including the ouster of Canopy’s co-Chief Executive Bruce Linton in July. The scandal involving illegal growing at CannTrust, that continues to hammer that stock, added to the gloom, along with a regulatory crackdown on Curaleaf for claims it was making for CBD-based products.
Curaleaf posted second-quarter earnings late Tuesday that showed widening losses and lower-than-expected revenue, although the company also forecast more than $1 billion in 2020 revenue. The company said its loss grew to $24.4 million, or 5 cents a share, from $4.9 million, or a penny a share, in the year-ago period. Net revenue rose to $48.5 million from $14.6 million in the year-ago period and $35.3 million in the prior quarter.
Curaleaf also manages several cash-producing entities, which collected $6.6 million in revenue during the second quarter. Analysts polled by FactSet expected revenue of $49.8 million. There were not enough analysts to form a reliable consensus for earnings.
GMP analyst Robert Fagan said the revenue number was below his $51 million forecast, but the revenue forecast is the highest issued to date and excludes any contribution from recreational sales in Illinois, which recently legalized, or any other states that may do so soon.
“This should be supported by CURA’s large pending acquisitions and a significant capacity expansion planned across its entire platform, increasing production from 1.3m sq.ft. in 2019 to 2.3m sq.ft. in 2020,” Fagan wrote in a note to clients.
The company recently announced it is acquiring Select and Grassroots, along with tuck-in deals in Arizona, California, Nevada and Ohio.
The analyst reiterated his buy rating on the stock and C$24 price target that is almost three times its current trading level. U.S.-listed shares CURLF, +1.18% rose 9%, while the Canadian CURA, +0.00% also gained 9%.
Also in the news, iAnthus Capital shares ITHUF, -0.57%  rose 3.6%, after the company posted second-quarter earnings that also showed revenue missing estimates. GMP’s Fagan said some metrics still showed strong execution and margins improved from about 31% in the first quarter to about 52%. The company outperformed peers in Florida by capturing a roughly 2.5% average market share despite a relatively small retail presence, he said.
“We view IAN’s strong execution in FL as a concrete example of the company’s operational potential which should eventually be translated across its entire platform,” Fagan wrote in a note. He reiterated his buy rating on the stock.
Elsewhere in the sector, Canopy Growth CGC, -2.28% WEED, -1.60%  was up 1.9%, Cronos CRON, -0.36% CRON, +0.20%  was up 1.2%, and Aurora Cannabis was up 0.3%. Tilray rose 3.8% and Aphria was up 3.5%.
OrganiGram Holdings’s stock OGI, -1.17% rose 2.7%, Hexo HEXO, +1.53%  was up 3.6%. Aleafia ALEAF, -0.16% ALEF, +1.01%  was up 1.4%.
CannTrust CTST, -0.52% TRST, -2.95%  fell another 3%, Akerna KERN, -5.49% was down 2.9% and Greenlane GNLN, -5.20%  was flat.

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