NUGL Money: The Public Cannabis Sector

    Writers Credit: Larry Horwitz

    In 2014 an index covering cannabis stocks was launched and it immediately shut down from the organic traffic spontaneously finding its way to the site. There were no real cannabis stocks, but the interest was strong and it continues to this very day. 

    Fast forward to 2019 and capital markets throughout the world now trade stocks in virtually every sector of the international cannabis industry, mid-tier underwriters provide analyst coverage and cannabis itself is now a recognized “sector” trading in unison in a somewhat predictable fashion contingent upon economic and political events. 

    At no time in the modern era has a previous criminal enterprise been legalized, capitalized, launched and then traded in the public securities markets. IT JUST DOES NOT HAPPEN! But it did. 

    To best develop a working model of cannabis capital markets, its instructive to examine how we arrived at our present circumstances and identify forces shaping the cannabis capital markets throughout the world.  This allows some basic predictions for the future of the cannabis stock sector.   

    Courtesy: Beau Henderson

    The International Capital Markets. 

    United States federal cannabis prohibition distorts which stock markets trade which stocks and as a result,  price performance and market capitalizations then respond accordingly. 

                We are not kidding when we make the following statements:

    • Companies with cannabis operations in the United States cannot trade on the NYSE or NASDAQ, but cannabis companies operating outside the United States have full access to these markets.  So American companies do not have access to the American capital markets, but everyone else does!
    • Companies with cannabis operations in the United States cannot trade in Australia (ASX) nor on the senior exchange in Canada, the Toronto Stock Exchange (TSX); again American companies do not have access to these trading platforms either, but the balance of the world does. 
    • So Companies with United States cannabis operations trade either on the OTC Bulletin Board (which is not even a stock exchange) or on the Canadian Stock Exchange (certainly the junior exchange in Canada relative to the TSX). 

    It is not unusual for companies to secure a joint (gotta love that word) listing, where for example a United States company might trade on the OTCBB and the CSE, but this does not change the fact that American companies are shunned by major stock exchanges throughout the world, including the exchanges in their own country.  No one knows if or when this will change, but when it does no doubt it will fundamentally change the dynamic between the cannabis sector and the capital markets. 

    Courtesy: Matus Spiske 

    A Look Backward

    November, 2014, remember that long ago date? This is when financial market professionals began to pay limited attention to cannabis as a trading sector.  Viridian Capital (certainly one of the recognized leading observers of the space at that time), listed the following eight companies as the sector leaders:

    • Mentor Capital: woops, they almost immediately took that one down when their numbers were challenged; 
    • Novus Acquisition & Development;
    • Abattis Bioceuticals
    • United Cannabis Corp. 
    • Cannabis Sativa, Inc. 
    • mCig, Inc. 
    • Greengro Technologies
    • TerraTech Corp. 

    So here is where they are today:

    • Novus has one employee and is trading at six cents. 
    • Abbattis is trading at two cents
    • United Cannabis has 65 employees trading at 43 cents. 
    • Cannabis Sativa lost over $500,000 on gross revenues of $210,000 and is trading at $1.23 with a market cap of around $25m. 
    • MCig is trading at 3 cents with a market cap of $17m losing $3m on $3m in revenues. 
    • Greengro Technologies is no longer reporting but it still trades at one cent. 
    • TerraTech has lost 60% of its value in the last twelve months, with a $43m market cap trading at approximately 40 cents.  It is certainly at the head of the 2014 class with $31m in revenues, but still operating at a substantial loss. 

     None of these companies would be mentioned as a leading cannabis stock today. So what happened?  First the formation and then the subsequent invasion of the Northern Alliance. 

    The Northern Alliance Forms. 

    So unlike the United States, as all of us know, the country of Canada legalized cannabis throughout the country, putting its own “socialistic” spin with tightly controlled regulations and an oligopolistic approach to the industry (relative to the more free market, capitalist approach of the United States and other countries). 

    We use the term Northern Alliance because it has been a very well done partnership between the Canadian government and the industry, with the launch, support and continuation of what are now the largest, highest profile cannabis companies in the world.   All of which occurred in the five years since November, 2014. 

    A number of companies moved quickly to take advantage of this government support and no doubt three leaders were Tilray, Aurora and Canopy.  As the charts below illustrate, no doubt all of these companies have lot billions of dollars in market cap, but none of these companies are operating profitably with some continuing to lose substantial amounts.  The “ball-park” metric is 20x gross revenues and that is a remarkable statement.  

    3 year Tilray ($2.5b market cap)  $100m

    3 year Aurora ($6.2b market cap)  $300m plus in revenues

    Canopy 3 years ($8.29b market cap)  $300m revenues

    3 year composite

    5 year composite

    The American Revolution

    We characterize this phase as a revolution as it involves individual states legalizing recreational cannabis to the exclusion of the federal regulatory quagmire.   So Colorado and Washington in 2012 and Alaska and Oregon in 2014 all went recreational, but did not move the proverbial needle in the capital markets whatsoever.  The combined populations of these four states was half that of Canada and each state was its own isolated market assuring that American companies could not achieve the scale of the Canadian companies.  And then California went recreational and everything changed.  

    So unlike 1776, this revolution started in California and it redefined the capital markets…for a period of time. Three major players, all of which exceeded the $1 billion market cap level were Med Men, Harvest and Acreage.    While they are all not exclusive California operations, no doubt it was California recreational in 2016 that sent the movement of stock exhibited in the charts in motion. 

    Med Men two years

    Harvest Health & Recreation, Inc. 3 years

    Market cap: $891m 

    Acreage Holdings 3 year (ACRG.U:CNX)


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