Recently, cannabis stocks have seen massive growth amid burgeoning investor demand. Legalization efforts in the U.S. seem likely to play out in the near-term. Accordingly, there remains a tonne of investors interest in this space.
This investor interest has not escaped Canadian cannabis companies. Smaller-cap Canadian cannabis players have seen some pretty wild moves of late. Indeed, stocks like Aleafia Health Inc.(TSX:AH) have been big movers of late.
On a year-to-date basis, Aleafia stock is up 30%. That’s not bad. However, the stock is also down more than 50% from its February peak. This is a highly volatile play, and is made more volatile by its smaller market cap.
That said, analysts have recently been more bullish on this stock. Here’s why.
Bullish analyst sentiment on Aleafia
Recently, Raymond James analyst Rahul Sarugaser provided an “outperform” recommendation for Aleafia. This vote of confidence was given for multiple reasons.
First, Aleafia’s business model is one that is viewed as beneficial for long-term growth. Specifically, the company’s relatively low-cost production, top-rated cultivation and manufacturing facilities, and an array of innovative pot-based products are among the key drivers. These are key facets of any long-term investment, so this appears to be very bullish for fundamentals-oriented investors.
Additionally, Aleafia recently secured an exclusive deal with large private-sector union Unifor. This deal will support medical pot coverage for nearly 315,000 family members. Thus, expectations are that this deal could provide significant revenue growth in the second half of 2021.
Furthermore, Aleafia has been broadening its product offering. The company is set to launch a host of new SKUs aimed at the recreational cannabis market. This would supplement the company’s already diverse product portfolio.
Accordingly, the expectation is that continued growth in sales of the company’s new products, combined with its high-margin derivative products, could provide for continued strong revenue growth. The company’s net revenue growth rate of 233$ in Q4 2020 speaks to the amount of growth this company has already provided. Any sort of acceleration on this front could be very bullish for this stock.
The cannabis sector continues to be a highly-volatile growth market today. Accordingly, investors with lower risk tolerance levels need to consider this fact before jumping in.
Indeed, Aleafia’s stock price swings this year are an indication of how much sentiment can shift these stocks’ values in short order. While it appears the company has one analyst in its corner, the market will ultimately decide the fate of this company.
Being on the right side of the trade for such speculative plays isn’t easy. Therefore, I’m on the sidelines with respect to Aleafia right now.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Chris MacDonald has no position in any of the stocks mentioned.