Everyone Still Wants In on Cannabis Stocks

Once touted as the cannabis industry’s first real-life unicorn — nothing like the first unicorn, which turned out to be a colossal scam — nationwide dispensary chain MedMen appears to be in trouble.

Rumors that the company was out of cash and unable to pay its vendors, swirling online for most of the past week, seemed to be confirmed Thursday by MarketWatch, who reported that MedMen was offering to pay its suppliers in stock, an unorthodox arrangement — one that signals significant cash-flow problems — confirmed by company brass.

And like shares in other publicly traded cannabis companies — who, like MedMen, prefer to be listed on unregulated “pink sheet” exchanges rather than exchanges where their financial statements are audited, like NASDAQ — MedMen stock isn’t exactly a hot commodity. Peaking at $6.49 a share in mid-October 2018, shares in the company were trading at just 47 cents at the end of business on Thursday. MedMen has had to cancel its planned buyout of PharmaCann LLC (an all-stock deal once valued at $682 million) and is apparently attempting to sell its New York City medical-cannabis dispensary at a list price of between $50 million and $100 million.

MedMen’s woes may stem from ludicrously generous executive compensation, a fact pointed out by industry observers for many years. Or many the chain, with 33 locations across the country including in New York City, just grew too fast.

Whatever the analysis, MedMen is but one entry in an overall bear market for weed stocks, a famine period that’s lasted much of the last year and shows no immediate signs of recovering. MedMen also trades on securities exchanges in Canada, where other valuations of companies that were briefly unicorns — chief among them Canopy Growth Corp. but also onetime blue-chip stocks like Cronos and Tilray — have also taken haircuts so close they’re taking chunks of flesh.

So what’s the mainstream investor doing? Why, getting into weed stocks, of course!

Capital raises are down 20% across the board, Viridian Capital Advisors, which tracks such data, told MarketWatch, a dip that began almost a year ago.

That hasn’t stopped Standard & Poors, the vaunted financial services company famous for bond ratings (and maybe even more famous for somehow “missing” the assets it rated as AAA during the subprime crisis were junk bonds) from launching not one but two indices tracking the price of cannabis stocks. This “demonstrates a growing level of mainstream interest in the burgeoning industry” despite its obvious and well-documented woes, as Marijuana Business Daily wrote on Thursday.

One, the Standard & Poor’s/MX International Cannabis Index, launched on Nov. 18. Another, the S&P TSX Cannabis Index, started on Jan. 20. Not every stock is eligible — companies have to meet both a minimum capitalization as well as a daily value of trades to be on the first index, whereas it seems smaller companies can be listed on the second index without vetting — but the fact that S&P is even involved is a strong indication of public interest.

Another reason why stocks have taken such a dive is that most publicly traded companies do their business in Canada. This will be the way things are until federal legalization, or until a viable American company decides to go public. At this rate, the former might happen first. As it is, at least one major analyst thinks the worst is yet to come.

Christopher Carey, Bank of America’s leading equity analyst on cannabis stocks, recently told Benzinga that a brief rally enjoyed by stocks earlier this year is almost certainly going to precede an even steeper crash. Analysts “now assume a roughly 25 percent lower market size for Canada’s adult use market in 2020,” he told the website, and with a shrinking market come shrinking sales estimates for Canadian companies — whose best shot at growth seems to be a robust export market.

So things are in a bit of a rut at the moment, with no clear exit strategy. It won’t take much to trigger a rally, stocks spiked just before the New Year, eerily timed with the launch of recreational sales in Illinois, a rhythm we’ve seen before. So if you’re an institutional investor with a very long view, this might be the right time to buy or at least buy a sizable chunk of a struggling company with a very uncertain future at a bargain rate. What could go wrong?

Disclaimer: This writer holds still holds some stock in Canopy Growth Corp., but sold almost all of it to get through grad school.

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