Shares of cannabis stocks are dropping as Canada prepares to legalize marijuana sales on Wednesday, becoming the highest-profile country to tax, regulate and monitor cannabis’ growth, distribution and sale.

BENCHMARK SAYS BUY TILRAY: On Tuesday, Benchmark analyst Mike Hickey initiated coverage of Tilray (TLRY) with a Buy rating and $200 price target, citing its early leadership in the medical cannabis market in Canada and the upcoming legalization of recreational cannabis. He believes the company’s strategic alliance with Novartis (NVS) and supply agreements with Canadian pharmacies that give Tilray a competitive edge in the Canadian medical cannabis market, Hickey told investors. He also believes the potential international opportunity is “enormous,” estimating that the global cannabis market opportunity could exceed $200B over the long-term. Hickey said Tilray is “well-positioned to take a meaningful share of this market”.

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PRICE TARGET REMOVED: Roth Capital analyst Scott Fortune removed Tilray’s price target on October 2 after assuming coverage of the stock, citing “unprecedented volatility.” The analyst noted that Tilray has experienced extreme volatile trading, with the stock halted five times on September 19 and a 150-point trading swing on the same day. The stock has a small number of shares outstanding, significant short interest, and not many investors that can loan the stock to short sellers, he pointed out, adding that the cannabis industry continues to trade with extreme volatility due to M&A and partnership speculation. He reiterated a Neutral rating on the stock.

VERITAS SAYS SELL: Veritas analyst Stuart Rolfe began coverage of the Canadian Cannabis sector on Friday with four Sell ratings on Canopy Growth Corporation (CGC), Aphria (APHQF), Aurora Cannabis (ACBFF) and Cronos Group (CRON) in a note entitled “End of the Rainbow”. The analyst noted that investors have already driven stock valuations for the eighth largest publicly traded Canadian cannabis producers to a combined market cap of $55B on trailing twelve-month sales of $250M while “oversupply risks are rampant.” Even assuming 60% of the black market converts, Canada’s cannabis industry “looks wildly overvalued”, Rolfe said. The analyst, who sees an intrinsic value of C$30 for Canopy Growth shares, said the company may be at risk of too much exposure to positive projections, adding Canopy appears to have the most to lose if market conditions disappoint as it bet heavily on brand power and novel formulations. Rolfe called Aphria a “star unicorn” among the group, saying that despite the negative optics on the Nuuvera purchase, the company has been a leader in useful disclosure on strategies and operations and said he sees an intrinsic value of C$19 for Aphria shares. In addition, Rolfe, who sees an intrinsic value of C$13 for Aurora shares, said the company has acquired its way to becoming one of the largest scale bets on cannabis capacity available to public investors, but the company’s approach seems to be “a touch unfocused”. The analyst also said he sees an intrinsic value of C$4.50 for Cronos shares as the company’s positioning risks becoming “stale” as an undifferentiated grower with a few “solid” cannabis-related investments.

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