Cannabis stocks rally anew as analysts cheer latest tie-ups in growing sector

U.S.-listed shares of Canadian cannabis companies rallied anew Wednesday, as analysts cheered the latest linkups in the sector and remained bullish on a market expected to grow quickly once Canada fully legalizes the substance on October 17.

Cronos Group Inc. CRON, +11.03%  led the charge, climbing another 7% to put its one-month gain at 103%. The Toronto-based company climbed about 13% on Tuesday, after it announced what it called a “landmark partnership” with Boston biotech Ginkgo Bioworks Inc. that will seek to produce specific cannabinoids at scale.

Cannabinoids are specific molecules in marijuana that can produce effects in the human body, with the most commonly known subclasses being Tetrahydrocannabinol, or THC, and cannabidiol, or CBD. Cronois has pledged to fund about $22 million in research and development and issue up to 14.7 million shares to Ginkgo if the partnership meets certain milestones

GMP Equity Research raised its stock price target on Cronos by $7 to $17 on Wednesday, as it increased long-term revenue estimates on expectations of sales of cannabinoids as an active pharmaceutical ingredient to the drug sector.

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“With Ginkgo, Cronos has entered the major leagues in cannabinoid research,” GMP analysts led by Martin Landry wrote in a note, reiterating their buy rating on Cronos.

“Under a scenario where Ginkgo succeeds in producing cannabinoids at scale, this technology could be a game changer to reduce production costs. In addition, it could be a major differentiation factor for Cronos in terms of product offering, being able to offer large quantities of rare cannabinoids in a cost effective manner.”

Elsewhere in the sector, Nanaimo-based Tilray Inc. TLRY, +9.58% the first full-service weed stock to list on Nasdaq, climbed 3.4%. Ontario-based Canopy Growth Corp. CGC, +0.40%  was down 3%, but remains up 94% in the last month and up 113% in 2018 so far.

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Valens Groworks Corp. MYMSF, +3.94%  stock surged 4%, after Mackie Research initiated coverage with a buy rating and $4.50 price target. Valens is focused on producing and selling high-margin products using a proprietary extraction process, which Mackie analysts Greg McLeish and Nicola McFadden said sets it apart from rivals.

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They are expecting the company to benefit as Canada follows trends seen in those U.S. states where recreational cannabis has been legalized, such as strong demand for cannabis oils.

“The company will leverage this opportunity by offering clients proprietary extraction services to produce cannabis oil and derivative products,” they wrote in a note.

U.S. cannabis players were mostly lower. Cannabis remains a Schedule 1 drug in the U.S. at the federal level, putting it in the same category as heroin, LSD and ecstasy. That has stopped participants in the U.S. industry from having bank accounts that would be subject to federal supervision and insurance. That, in turn, has complicated the effort to grow the market, and handed Canada a valuable first-mover advantage.

But Canaccord analysts are expecting the U.S. market to gradually liberalize and note multiple legalization and decriminalization bills in the works. Federal prohibition has one advantage, in that it should allow the industry to develop without “substantial interference from larger players from traditional sectors,” analysts wrote in a Wednesday note.

Nevada-based Cannabis Sativa Inc. c CBDS, -1.37%  was down 0.3%, Colorado-based farmer GrowGeneration Corp. GRWG, -3.94%  shares fell 3.7%.

The Horizons Marijuana Life Sciences Index ETF HMMJ, -1.10% which tracks more than 20 cannabis companies in North America and trades on the Toronto Stock Exchange, was down 1.1%. The S&P 500 SPX, -0.54%  was down 0.4% and the Dow Jones Industrial Average DJIA, -0.16%  was down 0.1%.


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