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.
Historically, cannabis stocks have tended to move in unison. As the publicly traded cannabis sector evolves, though, we are beginning to see returns between various sub-sectors and even between the members within those sub-sectors vary from one another more than they have traditionally. The advent of more sophisticated investors, varying financial conditions among the companies and leverage to different drivers all suggest we should expect stock-picking to become increasingly important.
We break the cannabis sector into 10 different sub-sectors: Large American MSOs, Medium American MSOs.,Small American MSOs, Large Canadian LPs, Other Canadian LPs, Canadian Extraction LPs, Canadian Retailers, Ancillary Companies, CBD Companies and Biotech Companies.
Since the market bottomed in March, Ancillary Companies has been the strongest sub-sector. The New Cannabis Ventures Global Cannabis Stock Index includes 7 companies that provide goods or services to the industry, or 20% of the overall number of constituents, a representation that has expanded significantly over the past year or so as new ancillary companies have joined while many of the direct cannabis companies have been removed due to no longer meeting the minimum criteria.
Since March 18th, the Global Cannabis Stock Index has increased by 81%. As the chart illustrates, the ancillary companies have been leading the way, with 6 of the 7 companies outperforming the index:
With the index down 27% in 2020, it’s worth noting that 6 of these companies have positive returns year-to-date.
We think that there are several reasons why investors are opting for ancillary companies over direct cannabis companies. First, most of these companies trade on the NASDAQ or NYSE, which greatly expands the investor base. Second, many investors are seeing the ancillary companies as a way to get diversified exposure without having to bet on individual operators. Third, several of these companies are profitable, with some even paying dividends. Finally, these businesses are substantially less capital-intensive than direct cannabis operators.
We have been surprised by how slowly then public ancillary space has evolved to date, but we expect to see more companies in the future. Several SPACs have raised substantial capital that they can deploy only into ancillary or CBD companies. We are aware of private REITs considering going public as well.
One company apparently working on going public is behemoth Hydrofarm, an independent wholesaler and manufacturer of hydroponics equipment and grow lights. Earlier this year, it filed a Form D with the SEC indicating that it had raised $23.5 million from 18 investors as part of a $50 million private placement of equity. In December, it reported that it had sold over $7 million in convertible debt through a private placement directed by Aegis Capital. In late 2018, it reported that it raised $55 million in a private placement that included Serruya Private Equity and other investors.
We note that Scotts Miracle-Gro recently upped its guidance for its Hawthorne Gardening division, suggesting sales this fiscal year could be about $1 billion, up 45-50% from a year ago, and this type of headline in November could attract additional investor interest in the ancillary space.
Alan Brochstein’s 420 Investor is the only due diligence platform trusted by cannabis investors for over 6 years. The go-to premium service for investors to learn, explore, and profit from publicly-traded cannabis stocks. The primary goal of 420 Investor is to provide professional, real-time, objective information about the top cannabis companies in the market in order to help investors Capitalize on Cannabis™.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
To get real-time updates download our free mobile app for Android or Apple devices, like our Facebook page, or follow Alan on Twitter. Share and discover industry news with like-minded people on the largest cannabis investor and entrepreneur group on LinkedIn.
Get ahead of the crowd! If you are a cannabis investor and find value in our Sunday newsletters, subscribe to 420 Investor, Alan’s comprehensive stock due diligence platform since 2013. Gain immediate access to real-time and in-depth information and market intelligence about the publicly traded cannabis sector, including daily videos, weekly chats, model portfolios, a community forum and much more.
Use the suite of professionally managed NCV Cannabis Stock Indices to monitor the performance of publicly-traded cannabis companies within the day or over longer time-frames. In addition to the comprehensive Global Cannabis Stock Index, we offer a family of indices to track Canadian licensed producers as well as the American Cannabis Operator Index.
View the Public Cannabis Company Revenue & Income Tracker, which ranks the top revenue producing cannabis stocks that generate industry sales of more than US$7.5M per quarter.
Stay on top of some of the most important communications from public companies by viewing upcoming cannabis investor earnings conference calls.
Discover upcoming new listings with the curated Cannabis Stock IPOs and New Issues Tracker.
Alan & Joel
Note: A previous version suggested that the majority of the Canopy Growth C3 revenue is synthetic. We have reviewed filings and determined that this isn’t the case. With that said, we have never excluded that revenue from our Public Cannabis Company Revenue & Income Tracker because the company doesn’t break out the operational profit of C3.