Rising Cannabis Stock Prices Are Eliminating This Risk Factor

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What a wild year it has been! Despite the capital crunch the industry was facing on the tail-end of the vaping crisis as we entered 2020 and then, of course, the pandemic, the New Cannabis Ventures Global Cannabis Stock Index has rallied 149% off its March lows and is now up slightly year-to-date. The rebound, driven by improving fundamentals, along with much better liquidity than the publicly traded stocks have seen since early 2019, has essentially wiped out a risk factor for the leading MSOs: a potential debt overhang.

In March, with equity prices low and the fundamental outlook questionable, debt on the balance sheet became something that looked like it could become a major challenge. While most of the leading MSOs appeared to have reasonably low leverage on the balance sheet, the financial stress that took out weaker companies, like iAnthus and MedMen, could have cascaded. Now, though, many of the MSOs are in a position to prudently add debt, in our view, as they have moved to earn positive adjusted EBITDA and even free cash flow. On its conference call earlier this month, Curaleaf’s Executive Chairman Boris Jordan hinted to a pending debt deal to be announced in mid-December. In our view, the leading MSOs are going to be able to capitalize on the improving environment to extend their debt and perhaps even see lower interest rates.

The recovery in equity prices is having an additional benefit, as companies are now able to issue equity at substantially higher prices than a year ago. We have seen several MSOs sell stock over the past few months, and the offerings have been well absorbed. Another benefit to the higher prices is that companies are experiencing substantial warrant exercises. Ayr Strategies, which was already seeing some of its investors exercise their warrants on the open market, has taken the step to provide warrant holders with an incentive to do so. Both Jushi Holdings and Vireo Health have accelerated warrants as well, actions which will bring in substantial cash to both companies.

In Canada, where the fundamentals haven’t been as supportive, we note that several companies have been aggressively shoring up their balance sheets with equity sales or debt conversions. Recall that in May, we told our readers how smart Aphria was to repurchase $90.8 million of its convertible notes at a steep discount in exchange for its stock. We said then that we expected other LPs to follow suit. Indeed, both Supreme Cannabis and Tilray have subsequently exchanged debt for equity. With the similar goal of better liquidity and less financial leverage, Aurora Cannabis and Organigram issued equity this month. On its recent call to discuss fiscal Q1 financials, Aurora CEO Miguel Martin explained that they tapped the ATM shelf so aggressively because they felt that they needed to assure investors they had an ample runway to execute. The equity offering days later served to solidify that position further, and we note that the stock closed above the offering price of US$7.50 by 40% on Friday.

From our perspective, it looks like the worst is now behind for the large Canadian LPs. In fact, Aphria and Canopy Growth just posted 52-week highs, with Cronos Group edging towards one. Aurora Cannabis and Tilray are well off the lows and appear to be buying time to execute on their strategies. While we aren’t expecting the U.S market to open to the Canadian LPs, we are encouraged that the Canadian adult-use market is expanding rapidly. Additionally, it appears that their efforts in Europe and Israel are beginning to bear fruit for these large LPs.

One of the worst mistakes the Canadian LP leadership teams made was to take on too much debt, and the slow development of the adult-use market buried many of them. For the largest companies, this appears to be becoming less of an issue, with actions taken to cut costs and reduce debt. In America, the story is much better, as few larger MSOs took on too much debt, and the market development has been much more robust. With the rally in equity prices over the past eight months, dealing with the debt overhang is a challenge that is quickly fading.

In May, Alan informed 420 Investor subscribers that a powerful bull market had just begun. Just this week, he shared what he called an urgent market update, revealing a substantial but not widely discussed catalyst that he expects could accelerate the rise in cannabis stocks.

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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