U.S. pot analyst: 'Don't smoke the Kool-Aid,' but Hexo and Acreage are buys

The future of cannabis is looking less profitable, according to an analyst at MKM Partners who initiated coverage on five Canadian pot producers and two U.S. multi-state operators on Friday.

In a note entitled, “Don’t Smoke the Kool-Aid,” analyst Bill Kirk said the industry is set to become more commoditized as rising supply pushes down prices, and new entrants increase competition for the current crop of producers.

“We are already beginning to see the cracks in Canada: Pricing is down and consumption per federal licence is contracting,” Kirk wrote. “To us, this means the future presents a less profitable system than exists today.”

He issued a “buy” rating on Acreage Holdings Inc. (ACRG-U.CN)(ACRGF), suggesting shares are underpriced given the company’s potential to be acquired by Canopy Growth Corp. (WEED.TO)(CGC) should U.S. cannabis sales become federally permissible. HEXO Corp. (HEXO.TO)(HEXO) also received a “buy” rating based on the company’s perceived brand-building potential.

Kirk issued “sell” ratings on Curaleaf Holdings Inc. (CURA.CN)(CURLF) based on review data from Yelp and Leafly, and Aurora Cannabis Inc. (ACB.TO)(ACB) based on exposure to flat medical consumption growth.

Canopy Growth, Cronos Group Inc. (CRON.TO)(CRON), and Tilray Inc. (TLRY) received “neutral” ratings.

Yahoo Finance Canada

Download the Yahoo Finance app, available for Apple and Android.