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Wednesday, May 29, 2019
STOCKS: Canopy Growth stock climbs on news of U.K. skin-care deal; Hexo names COO
Canopy Growth stock climbs on news of U.K. skin-care deal; Hexo names COO
By Ciara Linnane
Published: May 22, 2019 2:28 pm ET
The biggest cannabis company is buying the skin-care and sleep-aid company for about $54 million
Cannabis stocks were mostly higher Wednesday, as investors digested the latest deal in the sector, Canopy Growth Corp.’s acquisition of a U.K. skin care company.
Canopy, the biggest cannabis company by market cap, owed to a $4 billion investment from Constellation Brands Inc., said it’s paying 43 million pounds ($54 million) in cash to buy London-based This Works, which offers a range of skin-care and sleep-aid products.
The deal “is a key aspect of a multifaceted hemp and CBD strategy as Canopy Growth continues to build upon its vertically-integrated production and marketing platform. That includes thousands of acres of hemp production across several continents, hundreds of millions of dollars of capital investment into hemp-derived CBD production and processing, rapid expansion across the European Union and other key regions, and the introduction of new CBD-infused products and brands to the global beauty, wellness and sleep solution space,” Canopy said in a statement.
CBD is widely argued to have wellness benefits, although there is not a great deal of research to back up the claims, as MarketWatch’s Sarah Toy has reported. The substance is also caught in regulatory limbo ever since the passage of the 2018 Farm Bill, which fully legalized hemp but moved regulation of CBD to the Food and Drug Administration, which is not allowing it to be added to food or drink for now.
The regulator appears less concerned about cosmetics and topicals, although it has taken action against companies for making claims regarding serious illnesses.
Elsewhere in the sector, Hexo Corp. stock HEXO-1.43% was flat after it announced the appointment of consumer goods executive Donald Courtney as its chief operating officer. Courtney has worked at food and beverage companies, including Mars Inc. and Pepsi Bottling Group and has experience in technology from stints at Christie Digital and LG Electronics. He was most recently COO for MedReLeaf.
Facebook Inc. FB+0.27% has decided to continue to work to block the sale of cannabis on its platform, after several months of internal and external deliberations, as MarketWatch’s Max A. Cherney reported on Tuesday.
Cherney attended a weekly product policy meeting with roughly 60 executives and staff from Ireland and Kenya, as well as U.S. cities, Washington, D.C., Los Angeles and Facebook headquarters in Menlo Park, as they ran through the relative merits and concerns of allowing content that touts cannabis sales and selling weed directly.
In regulatory news, the California Senate approved legislation on Tuesday that would allow people to start banks and credit unions that could accept cash deposits from marijuana retailers, as the Associated Press reported.Lawmakers are expecting such banks to make it easier for cannabis companies to pay their taxes, which fell far short of expectations in the first year of legalized recreational weed.
Cannabis is still illegal under federal law, which makes it difficult for federally-insured banks to operate in the sector. There are several efforts under way to protect banks from federal enforcement actions; the Secure and Fair Enforcement (SAFE) Banking Act is a bipartisan bill introduced in March that would protect banks and their employees from liability for federal prosecution when servicing cannabis companies. The bill is sponsored by Colorado Democratic Rep. Ed Perlmutter, Washington Democratic Rep. Denny Heck and two Ohio Republicans, Steve Stivers and Warren Davidson, and is supported by the banking sector, the National Association of Attorneys General and Treasury Secretary Steven Mnuchin, among others.
Separately, lawmakers are promoting the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, which gives each state the right to determine its own approach to cannabis legislation. That bill is backed by Elizabeth Warren and Cory Gardner, both Senate Democrats and presidential hopefuls, and Attorney General William Barr has said it is his preferred solution.
Among individual stocks, Harvest Health & Recreation Inc. shares were down 3.5%CA:HARV+10.81%as investors shrugged off a bullish note on the company from GMP Securities. Analyst Robert Fagan initiated coverage of the stock with a buy rating and C$18.50 ($13.80) price target that is roughly double its current trading level.
“Historically, the company’s core operations were focused in Arizona, however recently HARV has grown at an impressive speed through a series of license wins and acquisitions, resulting in one of the industry’s largest operating platforms featuring (on a pro forma basis) 28 open stores today, and ~136 estimated total dispensary licenses across 16 states,” Fagan wrote in a note to clients.
The analyst is expecting the company to open more than 100 stores in the next 2 years, potentially giving it the biggest retail network in the U.S., which is expected to be the world’s biggest cannabis market. Management told GMP it expects pro forma revenue of $900 million to $1 billion by 2020, which compares with Fagan’s forecast of $800 million.
“HARV has surfaced as the industry’s most aggressive acquirer, deploying an estimated ~$1.3b on M&A recently, ~60% more than the average of all MSO peers,” he wrote. “We expect HARV to continue its rapid consolidation with up to ~$500m in deployable cash for M&A, which should provide multiple future catalysts for HARV’s shares.”
Village Farms International Inc. stock CA:VFF+3.16% was slightly higher after a separate GMP note that raised its price target to C$25.50 from C$22.50.
“ VFF is among a select few that have exposure to two North American cannabis markets (U.S. CBD and Canada),” analyst Andrew Partheniou wrote in the note. “
The company has a strong pipeline in both countries that are expected to lead to multiple growth opportunities, said the analyst who rates the stock a buy.