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.
Friends,
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.
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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
- Exclusive: Canadian Cannabis Sales Increased 44% in August to Record $357 Million
- Greenlane to Acquire Portable Vaporizer Manufacturer DaVinci for Up to $20 Million
- HEXO CEO Departs
- Innovative Industrial Properties Expands California Presence With $60 Million Gold Flora Sale-Leaseback
- Jushi Taps Sundial Joint Venture for $100 Million to Fund Acquisitions
- Exclusive: This Cannabis Tech Startup Ascends by Offering More Robust Retailer Solutions
- Verano Borrows $120 Million at 8.5%
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Sincerely,
Alan & Joel
