Pot stocks may have cooled off in recent months but the industry is still hot and Bank of America Merrill Lynch expects it to get hotter as it reaches maturity.
The firm initiated coverage on a slate of cannabis companies this week ahead of the international stoner holiday of April 20, or the slang "420."
"We expect all companies to deliver attractive growth over the next few years, reflecting a low base and strong demand in a newly created legal cannabis markets, namely Canada," Bank of America Merrill Lynch analyst Christopher Carey wrote in a note. "Given we think every company will deliver attractive growth, which is much more driven by limited supply (not necessarily long-term differentiation), we don't think companies should be valued only on near-term delivery following this logic, we think there should be an equally important view on longer term value creation."
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Part of the reason for the industry's cool down in recent months is that the short-term growth story for many companies has gone up in smoke.
The stock has declined about 15% since last Monday, despite the Canadian cannabis company topping analysts' expectations for the period because it reported a decline in the amount of weed it sold in the quarter to 2,636.5 kilograms from 3,408.9 kilograms.
Bank of America initiated coverage on four different stocks in the segment including HEXO (HEXO) - Get Report , Cronos (CRON) - Get Report , Aurora Cannabis (ACB) - Get Report and Canopy Growth (CGC) - Get Report .
Cronos was the lone security to receive an underperform rating, with a $13 price target, while the other companies received buy ratings.
Canopy Growth on Thursday confirmed plans to buy U.S.-based Acreage Holdings (ACRGF) once and if cannabis is made federally legal in the United States in a deal that values the company at around $3.4 billion.
HEXO is Bank of America's top industry pick with a buy rating and $10 price target.
The firm said it believes the company has an attractive valuation when compared to its peers. Additionally, the company's five-year contract with the province of Quebec gives it more visibility on the supply side.
The firm also lauded its innovation and its joint venture with beermaker Molson Canada (TAP) - Get Report called Truss and its strong balance sheet. HEXO's cash on hand represents 10% of its $1.4 billion market cap.
Recently, Cowen analyst Vivien Azer hosted investor meetings with Aurora's management team and she noted that the company's production capabilities offer it a competitive advantage.
"ACB continues to ramp up its capacity by bringing facilities online as well as generating incremental efficiencies. Indeed, ACB indicated that it has raised its total projected capacity from +500k kg to +625k kg, which it expects to reach by mid calendar 2020," Azer wrote.