This Overhang Will Stick Around for Cannabis Stocks

You’re reading a copy of this week’s edition of the free New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. 

Sign up to receive a copy in your inbox each Sunday morning.


We have laid out our reasons for optimism that better times are likely ahead for investors after enduring two years of losses in the cannabis sector. We continue to believe better distribution and a broader set of products permitted for sale will help improve the Canadian market, and we expect accelerated medical and adult-use legalization as well as the scaling of existing operations bode well for the American market. Look for big revenue growth and profitability from the leading MSOs as the year progresses. With that said, one negative trend from last year that we don’t expect to change is the supply of stock.

Stock coming into the float can arise from a number of sources. Early investors and founders can cash out a portion or all of their stakes, and this is something that we expect will continue to be an overhang. Another avenue for supply of stock is that underwater public market investors will likely sell into rallies as they recover some of their paper losses. The most important source of supply, though, is likely to be from the companies themselves raising capital to cover operational losses or fund expansion.

This month, we have already seen substantial equity sales activity, with HEXO Corp repeating its Boxing Day debacle and selling more stock just weeks later on the same terms as that December 26th offering. This week, we saw Aphria, which teased investors during its recent conference call with talks of future dividends, issue C$100 million of stock at a discount to the market with warrants as well. We also saw a successful raise for cannabis REIT Innovative Industrial Properties, which sold $217 million of stock in an upsized deal that was followed by the stock actually rallying. This followed large raises over the past couple of months through its at-the-money offering (ATM) as well.

One of the positive developments for MSOs has been the expanded access to non-equity capital, with debt and sale/leasebacks becoming an alternative. Of course, not all companies are able to access these alternatives, and we have seen MedMen, for example, sell stock via a private placement, recently. The largest U.S. operators, which have leaner operations than Canadian peers, perhaps due to not having the luxury of abundant capital historically, likely won’t be able to achieve growth goals relying solely upon debt issuance and sale/leasebacks, so we are expecting to see more equity issuance from these leaders as the year plays out. In fact, with capital as a strategic advantage, we look for those that can raise capital effectively to do so to expand their competitive positioning relative to those who aren’t able to do so.

Investors need to temper their optimism somewhat by incorporating an expectation of increased supply of stock. Some of the challenge is merely technical, but some of it is more troubling, especially when the raises aren’t for growth capital or balance sheet repair. Take HEXO Corp, for example, which has been selling stock right at tangible book value, perhaps a signal that it expects its large operating losses to persist. Most of the LPs, including the largest ones, have relied upon debt over the past few years, and investors are watching this closely. Companies are being proactive in addressing upcoming maturities, and we think this augurs for more equity raises in that sector of the market. In the U.S., we think that the largest MSOs have some flexibility given their access to debt and sale/leasebacks, but many operators aren’t generating positive operating cash flow and will struggle to raise capital except through equity sales.

We think a key to investing successfully in the cannabis sector this year will be staying out of the way of capital raises and then perhaps rotating into the name after sale of stock, especially if it is for growth capital.

Join Alan Brochstein, founder of 420 Investor and Managing Partner of New Cannabis Ventures, at the Benzinga Cannabis Capital Conference in Miami next month. This is a great opportunity to learn about the industry and to meet with leading public and private companies.

To save 30% off your ticket price be sure to use code “NCV” at checkout. Click the link above or the image below.

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.

View the Public Cannabis Company Revenue & Income Tracker, which ranks the top revenue producing cannabis stocks that generate industry sales of more than US$7.5M per quarter.

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.

Find your place in the cannabis industry by visiting our Careers and Jobs Page and learn which companies are hiring aggressively.


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