This Pot Stock Is Bank Of America’s Top Pick As They Initiate Coverage In The Cannabis Space

Just in time for 420—an annual celebration for marijuana users—Bank of America names this pot stock its top pick in the space and says it could surge 48% higher.

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Bank of America analyst Christopher Carey joined a short but growing list of analysts covering the cannabis sector on Wednesday, naming Hexo (NASDAQ: HEXO) its top pick in the space.

“HEXO is our Top Pick in cannabis, screening compelling in our valuation framework vs peers (EV/sales and DCF), and with fundamentals grounded by the most de-risked cannabis supply in Canada (off-take with Quebec), an innovation-forward organization and potential for additional value-add partnerships (beyond that already developed with Molson Canada),” Carey wrote in a note to clients.

The firm estimates that the Canadian cannabis supply will exceed domestic consumption by 2021. When that happens, BofA expects the market to become more mature which will lead to greater competition for shelf space giving HEXO an advantage with its differentiated products and price deflation.

Carey gave HEXO a Buy rating and set his price target for the stock at $10 – 48% higher than Thursday’s closing price.

He’s also bullish on heavyweights Canopy Growth (NYSE: CGC) and Aurora Cannabis (NYSE: ACB). According to Carey, Canopy’s 6 million square feet of production capacity and its partnership with Constellation Brands (NYSE: STZ) put it in a good position to be a long-term market leader.

As for Aurora, Carey said that it is one of the few cannabis companies working to set up operations globally, which will set it up well to take advantage the growing global legalization of the drug. The company also has yet to enter into a major partnership, which leaves open the possibility of a major bullish catalyst in the future.

Carey issued a Buy rating for Aurora with an $11 price target, 22% higher than the current price. Canopy Growth was initiated with a Buy rating as well and given a price target of $52 – nearly 17% higher than Thursday’s closing price.

The analyst wasn’t as kind to another big name in the cannabis space, however.

He issued an Underperform rating on Cronos (NASDAQ: CRON) and gave it a $13 price target, indicating possible downside of -17%. While Carey likes the company’s fundamentals, its current valuation is a red flag for Carey.

“For Cronos, we expect attractive long-term growth and margins, while also giving credit for the cash from Altria (NYSE: MO),” Carey wrote. “Despite this, the stock still screens the most expensive in our coverage. A key risk to our rating is that Cronos deploys its recently injected capital for deals in geographies or categories the market deems attractive. Otherwise, we don’t see a case for near-term upside.”

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