Alliance Global Partners initiated coverage of four cannabis companies on Thursday and assigned a buy rating to all four stocks, namely Acreage Holdings Inc., Village Farms International Inc., Green Thumb Industries Inc. and GrowGeneration Corp.
But analyst Aaron Grey’s bullish stance failed to light a fire under all four stocks with Acreage Holdings ACRGF, -2.65% last down 1.3%, despite Grey’s $15 stock price target, that is almost double its current price of $8.18.
Village Farms VFF, +0.93% rose 2% and Green Thumb GTBIF, +2.97% was up 2.9% while GrowGeneration GRWG, -0.20% added a more modest 0.8%.
Grey is expecting Acreage Holdings to benefit from new store openings, the expansion of its wholesale business and integration of the recently acquired Form Factory, and forecast that the company will be profitable by the second half of 2020.
“In addition to the fundamentals, we view the company as attractively priced given it trades 50% below the implied price from the WEED deal as we see a high likelihood of the STATES Act passing over the 7.5 year period (and acting as a trigger event for the acquisition),” he said, referring to the agreement with market leader, Canada’s Canopy Growth Corp. CGC, -8.51% , WEED, -8.71% that gives that company the right to buy Acreage as soon as cannabis restrictions in the U.S. have been lifted.
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The analyst assigned a C$23 ($17.26) stock price target to Green Thumb.
“We like management’s focused strategy on executing in markets where the company believes it has a strategic advantage, as demonstrated by its strong positioning in markets such as Pennsylvania and Nevada,” Grey wrote. “In addition to strong top-line trends, the business model has now inflected to profitability, which margins we expect to expand as the company scales the business.”
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Green Thumb reported margins of 52% in the second quarter, a 580 basis point improvement over the year-earlier period. The company is expecting to maintain margins above 50% in the future and is targeting EBITDA margins — earnings before interest, taxes, depreciation and amortization — of 25% to 30%, said Grey.
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The analyst placed an $8 price target on GrowGeneration, which he views as an attractive ancillary play in the industry as a hydroponics retailer in the U.S. with a strong top-line story. The company is on track to double revenue for a fourth straight year through organic store growth and tuck-in acquisitions.
“What is more, with GrowGeneration’s 9% EBITDA margin in the second quarter, we believe the company has proven its ability to grow the business while generating profit, with further margin enhancement opportunity via gross margins (private label opportunity) and SG&A (scale and ERP (enterprise resource planning) system).”
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Grey placed a C$26 price target on Village Farms, describing it as an attractive investment opportunity as a leading cultivator in the Canadian market via its joint venture Pure SunFarms.
“Having demonstrated its ability to grow at scale the past two quarters, while putting up best in class margins – we believe VFF will benefit from the growing Canadian market (which market estimates we take up herein), particularly with the recent receipt of its packaging license,” he wrote. “Additionally, we see the US CBD/Hemp opportunity as upside to our numbers.”
The ETFMG Alternative Harvest ETF MJ, +0.00% was last down 0.6%, while the S&P 500 SPX, +0.00% was up 0.2% and the Dow Jones Industrial Average DJIA, -0.19% was up 0.1%.