Dramatic price swings have plagued cannabis stocks listed on the New York and Canadian exchanges, and very few long-term winners have emerged. Even after cannabis was deemed “essential” during the pandemic, coaxing investors into the industry remained a struggle.
Private capital funded the early stages of growth for the vast majority of companies, but there always has been an expectation that weed will become legal on the federal level and the floodgates will open to a cash infusion from public stock listings. Things haven’t worked out that way just yet. Now, as companies small and large contemplate expansion, mergers, acquisitions, or closing up shop, even multistate operators (MSOs) are struggling to raise money in public markets.
Operator frustration
“It’s frustrating, because you look at these companies that report and the numbers are phenomenal from the MSOs,” said Nick Kovacevich, chief executive officer at KushCo Holdings. “The growth is there, right? They’re executing and doing a phenomenal job, yet their stocks are waning across the board.”
KushCo (OTCMKTS: KSHB) recently merged with Greenlane Holdings (GNLN), which has maintained a NASDAQ listing since 2019; GNLN will be the merged company’s ticker symbol when the deal is finalized this fall. As the new company moves forward, Kovacevich said it will be the largest ancillary entity of its kind in the industry—selling packaging, containers, cannabis accessories, smoke-shop products, et cetera—and one of the very few with a NASDAQ listing. Nonetheless, the company will have its work cut out for it when it comes to convincing investors to climb aboard.
“We’ve got a strong balance sheet but we’re also losing money, and that’s going to be the knock on us,” he explained. “So, now we’ve got to show investors that we have a path to profitability that we’re able to execute on, and we’ve got to grow margin and ultimately grow profitability. So we’ve got some execution and some proving that we need to do. But we do check several of the boxes that should get investors very excited about the new company.”
Institutional investors
Kovacevich estimates about 80 percent of the total investment base consists of institutional firms that buy stocks on behalf of mutual funds, pensions, insurance companies, and other large pools. Up to this point, the whales of Wall Street have taken a cautious, mostly hands-off approach with cannabis stocks, whether they are plant-touching or ancillary companies.
When Curaleaf Holdings reported its second-quarter earnings this summer, the numbers were impressive: $312 million in revenue, up 166 percent year-over-year. One might have expected investors to reward those results with some enthusiasm and an uptick in the stock price, but no such luck.
“You can buy Curaleaf for the same stock price you could have bought them for back in May 2019, after they had reported only $40 million in quarterly revenue,” said Kovacevich. “They’re doing almost ten times that now, and the price is flat?”
In a June edition of New Cannabis Ventures’ weekly newsletter, an analyst noted, “The largest MSOs have experienced a plethora of favorable news so far this year, including continuing strong top-line and bottom-line financial reports for Q4 and Q1. We find it odd that these stocks are slightly underperforming the benchmark, especially given their strong growth trajectories. In fact, it’s not just the largest MSOs, as the American Cannabis Operator Index has gained just 10.5 percent thus far in 2021.”
Of the six cannabis-related stocks Motley Fool recommends buying in 2021, three are ancillary companies and one is a biotech operation. Only Trulieve Cannabis (TCNNF) and Green Thumb Industries (GTBIF) are plant-touching enterprises, and both are listed only on Canadian exchanges. The ancillary companies are focused on real estate, cultivation supplies, and nutrients.
A question of when
All of this begs the question, “When will cannabis stock prices, both in the U.S. and Canada, start to attract more steady investment?”
According to Kovacevich, “The problem is the vast majority of capital that’s available to invest in publicly traded companies of all kinds is not yet investing in cannabis. So, it’s really how do you get them off the sidelines and into the game? Well, at some point, maybe the valuation becomes so attractive that there are people who were on the fence and didn’t want to take the compliance risk, but now it’s become too attractive and they can’t pass up the opportunity.
“Sure, that might happen, and it has happened,” he added. “But that’s not going to unlock the big pools of capital we need to power this industry to the next level. That will only happen with federal legalization.”
