You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
The 3rd quarter will end this coming Friday, and it looks like the New Cannabis Ventures Global Cannabis Stock Index will post its first positive quarter since 2021 after 9 straight quarterly declines. The bounce was due, of course, to the potential rescheduling of cannabis.
Despite the bounce, the cannabis market is still way down from its peak in early 2021, falling almost 90%, and it is now down again year-to-date. This rally halted this past week, and the index has dropped 19% from its peak on 9/11. The sell-off seems to have been triggered by the equity sales that were announced this week by Canopy Growth and The Cannabist Company (formerly Columbia Healthcare).
We were not that surprised to see the equity raises. We have discussed the very weak balance sheet at Canopy Growth, and The Cannabist Company needed to improve its too after the failed merger. Selling stock at triple the recent all-time low seemed to make sense!
To us, it seems that investors began to assess the likelihood of other companies selling stock. One of the most likely to do so, in our view, is Curaleaf, and its stock was hammered this week, falling almost 20%. We remain concerned that the rescheduling may take a while or could fail to meet expectations, falling to only Schedule 2, which would result in no end of 280E. We also believe that the federal government could impose another tax if 280E were to go away.
An adverse outcome or a delay could weigh heavily on Curaleaf. As we pointed out a few weeks ago, the company has a much worse balance sheet than peers, loaded with debt and a very low ratio of current assets to current liabilities. The stock also trades at a big premium to its peers.
We continue to believe that the MSOs are cheap and could do better if 280E goes away quickly, but this new overhang for the sub-sector of potential equity sales is likely to continue to weigh on it. We believe that investors can find ancillary companies or Canadian LPs that have better balance sheets, better valuations and less downside.
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Alan & Joel