2 Cannabis Stocks Wall Street Predicts Will Surge More Than 70%

Cannabis investors have experienced a challenging 2021.  The ETFMG Alternative Harvest ETF (MJ) is down 6% year to date and the AdvisorShares Pure US Cannabis ETF (MSOS) is down 14%.

However, according to Mordor Intelligence, the cannabis market is expected to expand rapidly in the coming years, growing at a CAGR rate of 18.1% between 2021 and 2026. The market growth is projected to accelerate from today’s levels due to the legalization of cannabis at a faster pace, proven medicinal usage of cannabis, and further diversification of the cannabis products portfolio. 

Therefore, now could be a good time to buy the dip in cannabis stocks.  Today I will analyze two marijuana stocks, Neptune Wellness Solutions (NEPT) and HEXO Corp. (HEXO), that Wall Street analysts predict will rally by more than 70% in the coming months. 

Neptune Wellness Solutions Inc.

Founded in 1998, Neptune Wellness Solutions (NEPT) is a wellness company that provides nutraceuticals, legal cannabis and cannabis-related products.

Year to Date (YTD), shares of the wellness brand have plunged over 60%.

Recent Developments 

On August 2nd, the company announced the launch of Mood Ring branded cannabis flower in Alberta. As a result, the company expects that this development will accelerate its growth rates as well as improve its margins profile. 

Financial Overview

On August 12th, NEPT reported earnings for the first quarter of fiscal 2022. In Q1, total revenue has risen 10% year-over-year to C$12.37 million. Also, NEPT managed to beat analysts’ estimates, topping by C$1.19 million in revenues. The company reported Non-GAAP EPS of (C$0.12), beating Wall Street expectations by C$0.084.

The company’s Adjusted EBITDA loss stood at (C$15.9 million) compared to (C$2.5 million) in Q1FY2021.

Let’s also take a look at the company’s balance sheet. As of June 30th, 2021, the company had cash and cash equivalents of C$48.6 million, which is 36% lower compared to the previous quarter due to higher core operating cash expenses. However, it’s still enough to run the company’s operations for at least two quarters, considering the 1QFY22 cash burn rate of C$22.9 million.

Analysts’ estimates & Valuation

Analysts expect NEPT earnings in the second quarter of fiscal 2022 to increase to ($0.09) per share, exceeding its year-ago value of ($0.15). Moreover, analysts forecast that its Q2 revenue would stand at $11 million. 

Let’s consider the company’s valuation multiples. When it comes to EV/Sales FWD, the stock’s 1.74x is 13.5% lower than the 2.01x sector median. However, the company’s FWD P/S multiple of 1.87x trades with a moderate premium compared to the sector’s median P/S ratio of 1.46x.

According to TipRanks, NEPT has a “Moderate Buy” rating with an average price target of $1.00, indicating an about 70% upside opportunity. 

HEXO Corp.

Headquartered in Kanata, Canada, HEXO Corp. is a company that produces, markets, and sells cannabis as well as other cannabis-related products in Canada.

Since the beginning of the year, shares‌ ‌of‌ ‌HEXO Corp. are down more than 40%.

Recent Developments 

On August 30th, the company announced the completion of its $925 million acquisition of Redecan, Canada’s largest privately-owned licensed producer. Under the terms of the deal, Hexo is expected to pay $400 million in cash as well as deliver about 69.7 million of its shares. Earlier in August, the company went to capital markets and raised about $144.8 million to support its acquisition of Redecan. In my view, this purchase will deliver significant value for HEXO in the long term, creating a great “buy the dip” opportunity. 

Financial Overview

On June 14th, Hexo reported earnings for the third quarter of 2021. In Q3, total revenue has risen by only 2.3% year-over-year to C$22.7 million, missing Wall Street estimates by C$11.9 million. However, Hexo’s net loss decreased by 23.6% to C$16.09 million from its year-ago value of C$21.06 million. 

The company’s EBITDA came in at (C$10.78 million) versus (C$0.2) million in Q2 2021. 

Looking at HEXO’s liquidity position, the company had C$81.04 million in cash as of April 30th, 2021. The company also managed to decrease its cash burn rate from C$93.6 million in 3Q20 to C$16.84 million in 3Q21. Thus, HEXO won’t face any liquidity problems, at least by the year-end.

Analysts’ estimates & Valuation

Wall Street expects HEXO’s earnings to rise in the fourth quarter of 2021 to ($0.07) per share, substantially exceeding its year-ago value of ($1.15). Moreover, analysts estimate that its fourth-quarter revenue could grow by 35% year-over-year to $27.1M.

Let’s take a look at EV/Sales and P/S multiples for HEXO stock as well. Due to the recent drop in its stock price, the company has become more attractive from a valuation standpoint. When it comes to Price/Sales TTM, the stock’s 2.66x is 66.02% lower than the 7.84x sector median. Also, the Hexo’s TTM EV/Sales multiple of 6.02x looks discounted by about 16% compared to the sector’s median P/S ratio of 7.12x. 

On TipRanks, the average price target for HEXO is $5.11, indicating an over 145% upside opportunity.