After a 60% drop in 6 months, Bank of America says buy pot stock Canopy

Published Wed, Nov 20 20198:32 AM ESTUpdated Wed, Nov 20 20198:32 AM EST

With shares down more than 60% over the last six months, it's tough to remain pessimistic on marijuana grower Canopy Growth , according to Bank of America Merrill Lynch. The brokerage upgraded the Canadian cannabis producer to buy from neutral on Wednesday and told clients that the stock's 2019 swoon has tempered valuation and earnings estimates to more reasonable levels. "Street estimates [are] achievable (even beatable) for maybe the first time in Canopy's history as a public company," analyst Christopher Carey wrote in a note. With leaner channel inventory and improving retail data ahead, "a bear case based on multiple compression and to a certain extent cash burn (despite still years of cash) seems less robust now." Part of the problem for Canopy (and peers) for much of 2019 was a build-up of inventory supply as a growing-but-still-small number of provincial retailers worked down their initial purchases of cannabis through the third quarter. Now that retailers are making sales, however, the pace of cannabis purchases from growers like Canopy can finally start to normalize. "Two months ago, we were concerned about consensus sales estimates. Simply put, this is no longer the case," Carey told clients. The analyst noted Wall Street's expectations for the company and the sector more broadly continued to fall following Canopy's disappointing second-quarter earnings report last week. Canopy posted a net loss of CA$374.6 million ($282.4 million), or CA$1.08 a share, in the quarter, larger than the CA$330.6 million loss, or CA$1.52 a share, posted in the year-earlier period. The company also announced in July that former co-CEO Bruce Linton would be stepping down. Linton later explained to CNBC that the company's board fired him from the company he founded. "The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market," Canopy CEO Mark Zekulin said in a press release on Thursday. "However, we believe these conditions are a short-term headwind in what is a brand-new industry, and Canopy continues to be best positioned with cash-on-hand, a world-class infrastructure, and a portfolio of intellectual property to deliver sustained, long-term market leadership," he added. The company's s