Following last week’s plunge in marijuana stocks, this week brought some positive news to the sector.
The week’s major news in pot stocks came from Hexo again, but also from Aphria, which reported its second consecutive profitable quarter on Tuesday.
Hexo takes on black market weed
On Wednesday, Canadian cannabis company Hexo Corp. unveiled a new product it hopes will help consumers shift away from the black market, which is still hindering legal sales.
The bulk pot product dubbed Original Stash will retail for $125.70 for 28 grams – a deal that resembles prices on the illicit market for weed.
However, the black market-priced pot deal doesn’t constitute “a loss-leader,” the company said, but is rather “a sustainable product offering.”
“Over the last year, we’ve onlined over a million square feet of greenhouses, our manufacturing capability is better than ever. […] We’re maintaining a high-quality product, but cutting costs down dramatically,” chief executive Sebastien St-Louis told BNN Bloomberg.
Shares of Hexo surged 17% at the end of the session on Thursday, closing at $2.89 per share on the New York Stock Exchange.
Aphria earnings boost cannabis sector
Aphria Inc. posted better-than-expected earnings this week, reporting a net income of $16.4 million on sales of $126.1 million in the fiscal first quarter.
The financial update that beat forecasts buoyed the stock during trading on Tuesday before shares stabilized at $6.45 per share on the Toronto Stock Exchange on Thursday.
Seaport Global Securities analyst Brett Hundley described the results as “solid” as the Canadian cannabis market “badly needed positive data points” following last week’s warning from Hexo that hammered marijuana stocks.
Still, Hundley downgraded Hexo and Canopy Growth this week from buy to neutral, leaving only Aphria in the buy-rated category.
The bearish note cautioned investors that prices are expected to “drop considerably.”
“We see a headwind for the Canadian cannabis market ahead, based on sizable industry supply that will aim to funnel into a limited retail store set. We expect pricing and margins to drop considerably,” analysts Brett Hundley and Luke Perda wrote.
In the same note, they advised clients to focus on the US market instead: “As for the US multistate operator group, we see a completely different set of circumstances in place, and we would broadly recommend that investors rotate away from Canada and toward the US.”
As legalization 2.0 in Canada takes effect, Health Canada will start accepting applications from companies that wish to enter the market for cannabis-infused beverages and edibles – the next big opportunity for marijuana businesses as a Deloitte report estimates the new market could be worth $2.7 billion annually.