These Rising REITs Point to Sustained Cannabis Industry Growth Ahead

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.

Subscribe to receive our free weekly newsletter in your inbox each Sunday morning.


Five weeks ago, just ahead of what served as an interim low for the New Cannabis Ventures Global Cannabis Stock Index and just after the American Cannabis Operators Index had put in what was also proved to be an interim low, we suggested that three poorly performing stocks were either signaling a problem ahead or were offering a potential investment opportunity. Since then, these three stocks, all leveraged to the expected buildouts ahead by cannabis operators as new states come online, have generally performed poorly, with two falling by more than 18%. After this decline and with both the Global Cannabis Stock Index and the American Cannabis Operators Index sitting at 2021 lows and down 4.5% and 20.9% year-to-date, respectively, it’s easy to conclude that trouble lies ahead, but we think this is the wrong conclusion.

2021, the year of the great round trip for the cannabis sector, has been frustrating for investors, with massive gains early in the year wiped out over the balance. Many have discussed the disconnect between the price action and the valuations and fundamentals. While trying to call the end of the downturn since the parabolic spike in February is a difficult task, we expect that strong fundamentals will ultimately drive the prices.

Since last November, we have pointed to a risk of slowing cannabis sales due to boosted demand following the onset of the pandemic. The recent data has certainly shown a slowdown. Earnings season begins in a little more than a week, and Q3 will be the toughest comparison. During the summer of 2020, consumers had excess time and disposable income, and these factors, among others, drove very strong consumption trends. The good news is that the comparisons will get easier for Q4 and beyond.

The growth of the industry isn’t limited to just same-store sales. It depends upon not only new states, like Connecticut, New Jersey, New Mexico, New York and Virginia, all of which have implementations of new adult-use programs ahead, but several other factors, including adding additional capacity or stores in markets that are constrained and expansion of retail into municipalities or counties that have previously imposed limitations on adult-use sales. This continues to play out and will be driving additional growth. Another driver of future growth is the continued erosion of the illicit market.

This downturn over the past eight months has been very different from the prior one. Recall that the vaping crisis in late 2019 triggered a capital crunch that left the industry struggling to expand. Back then, most operators weren’t yet generating positive cash flow. Despite low stock prices, selling stock looked like one of the only options at that time.

We have discussed how capital is becoming increasingly available to cannabis companies, whether through debt, mortgages or sale-leasebacks. This continues to be the case, with substantial transactions announced by leading providers of debt or sale-leasebacks just this past week that extends upon a trend that has been in place now for several months. While the stock prices of cannabis companies seem to reflect pessimism, the stocks of these capital providers suggest the growth we are discussing will indeed play out over time. In contrast to the recent 4.6% decline in the American Cannabis Operators Index from its prior low on 9/14, the three publicly-traded REITs that cater to leading MSOs have seen their stocks appreciate since then:

The strong relative performance reflects robust demand for capital, and we believe that the REITs will be able to help fund the build out cultivation facilities in existing and new markets. If their investors didn’t believe that the funds could be deployed effectively, the stocks would likely not be rallying. This is great news, as it reduces the likelihood of equity offerings by operators to fund expansion.

Several weeks ago, we spotted a potential negative harbinger in the price action of the hydroponics suppliers, with their investors believing demand will slow. Now, we are seeing strength in a set of companies leveraged to the exact same trends. In the short-term, the stocks of the hydroponics companies and cannabis operators may not be properly reflecting fundamentals. Instead, technical factors, including tax-loss selling, may be playing a role. Perhaps there is too much concern regarding near-term sales trends, with investors extrapolating the slowing growth out over longer time-frames. We remind readers, though, that these new markets are coming online and that several existing markets that continue to be underserved by the legal market are expanding. The strong performance of the REITs suggests that at least their investors understand these dynamics.

Get the facts and be ready for important cannabis catalysts with a subscription to Alan Brochstein’s 420 Investor, the longest running due diligence platform trusted by cannabis investors for over 8 years. The primary goal of 420 Investor is to provide professional, real-time, objective information about the top cannabis companies in the market in order to help investors Capitalize on Cannabis™.

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

To get real-time updates download our free mobile app for Android or Apple devices, like our Facebook page, or follow Alan on Twitter. Share and discover industry news with like-minded people on the largest cannabis investor and entrepreneur group on LinkedIn.

Get ahead of the crowd! If you are a cannabis investor and find value in our Sunday newsletters, subscribe to 420 Investor, Alan’s comprehensive stock due diligence platform since 2013. Gain immediate access to real-time and in-depth information and market intelligence about the publicly traded cannabis sector, including daily videos, weekly chats, model portfolios, a community forum and much more.

Use the suite of professionally managed NCV Cannabis Stock Indices to monitor the performance of publicly-traded cannabis companies within the day or over longer time-frames. In addition to the comprehensive Global Cannabis Stock Index, we offer a family of indices to track Canadian licensed producers as well as the American Cannabis Operator Index and the Ancillary Cannabis Index.

View the Public Cannabis Company Revenue & Income Tracker, which ranks the top revenue producing cannabis stocks.

Stay on top of some of the most important communications from public companies by viewing upcoming cannabis investor earnings conference calls.

Discover upcoming new listings with the curated Cannabis Stock IPOs and New Issues Tracker.


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

Get Our Sunday Newsletter