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.
It was a big week for cannabis sector, with the New Cannabis Ventures Global Cannabis Stock Index tacking on to its massive Q4 gain of 62% by beginning the year with a 20% rally. We have been discussing how the potential change of control of the Senate would be perceived as a major catalyst, and indeed it was.
Ahead of the election outcome, Jushi Holdings raised what ended up being C$40 million after the underwriters exercised their option to boost the size, while Curaleaf and Columbia Care followed up with bought deals on Thursday. As detailed in the table below, all of the offerings were at substantially higher prices than where the stocks closed at the end of Q3, and the discounts to the close the night before pricing were reasonably low. None of the deals had warrants included, and all of the stocks were able to hold the issue price, though Columbia Care, which priced after the close Thursday, did dip slightly lower during trading on Friday for what was the largest deal relative to the market cap among the three:
Those who have followed the sector have seen this story end very poorly in the past for Canadian LPs, where investors who bought the initial capital raises were quickly under water as other companies raced to raise capital. We believe this round of capital raising by MSOs will not significantly slow down this rally.
The large rounds of financing for the Canadian LPs were quite speculative at the time. The medical markets were still relatively nascent, and the companies had small revenue and big losses. The first reason to not fear MSO equity sales, then, is that the fundamentals are substantially better today for the MSOs. Investors in the large LP financings in 2017 and 2018 were betting on a very uncertain environment ahead of adult-use. We wrote about a big selloff in late 2017 that was preceded by a round of equity sales. One of the companies that sold stock was Aphria, which raised C$80 million. It had just reported quarterly revenue C$6 million, and it was unprofitable. Quite simply, investors in the MSO offerings are investing in companies that are much further along today than the LPs were then.
We have been discussing how institutional investors have begun to invest in the space, and one of the challenges for them is actually finding enough stock. This was the reason the unnamed institution bought shares in a private transaction with GTI holders (twice). These offerings this week were priced at relatively narrow discounts on a bought-deal basis most likely because the underwriters are well aware of the demand.
Beyond institutions, there is another aggressive large buyer in the market, the AdvisorShares Pure U.S. Cannabis ETF (NYSE ARCA: MSOS), which has been growing exponentially. Recall that in early December we described this ETF as a game-changer for the MSOs. At the time, the ETF had assets of $163 million. Over the past five weeks, it has soared to over $400 million. The rise in the price explains part of the increase, but it has been primarily growth in the number of shares, which grew 61% in just the past week. Here is an update of the growth in the number of shares, which have increased 113% since our update five weeks ago:
We continue to expect this ETF, currently at $410 million, to exceed $1 billion, perhaps by the end of January. As we discussed, the ETF puts a floor under the market, as it is providing deeper liquidity that helps to take the perceived risk out of new issues declining substantially. The emergence, then, of a large and growing buyer of MSOs that is helping to funnel retail demand is another factor that suggests the capital raising will be absorbed.
Since 2018, when many of these companies went public, there have been few equity offerings. With prices under pressure from the end of 2018 into mid-2020, there have been few equity offerings in general as the MSOs turned to debt and sale-leasebacks to fund their expansions. The fundamentals for the American cannabis operators have never been better, and investors are seeing this. We believe that there is a tremendous demand for the stocks that will meet the supply.
Finally, historically the supply hiccups that led to major price corrections have tended to take place late in the year. This increase in supply comes at the beginning of the year, when investors tend to be less risk-averse. We believe the MSOs will be easily able to illustrate potential high returns on investment for the capital raised, whether it’s through organic opportunities or M&A. With the chorus of states looking to legalize this year getting louder by the week, we expect these equity offerings will continue to be easily absorbed by the market.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
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Alan & Joel