Viridian Chart Of The Week: Even In A Correcting Market, Positive Earnings Surprises Are Rewarded

• The blue bar in the graph shows the percentage by which 4th quarter 2020 EBITDA exceeded consensus analyst estimates as reported by FactSet for each of the seven top MSOs that have reported. The orange line shows the next day percentage change of the stock price less the percent change of the North American Marijuana Index. This netting was done in order to isolate the impact of the earnings announcement away from the impact of movements in the overall cannabis stock market.

• The first striking fact is that six of the seven companies beat analysts' estimates. In the days prior to Reg FD, this would not have been surprising as it was common for investor relations officers to “nudge” analysts' estimates in the “right” direction. Nowadays, this is less common, and cannabis earnings have been known to be somewhat opaque. Only AYR, underperformed analyst’s expectations possibly due to the difficulty of giving appropriate effect to the company’s acquisitions.

• The earnings releases covered by this graph occurred over the period between March 11th  and March 25th during which the North American Marijuana Index fell 14.0%. The index is now down 41.1% from its peak on February 10th.  But even in a generally down market, positive earning surprises were rewarded by stock gains.

• Speculation abounds regarding the reason for the recent cannabis stock pullback. Our view is twofold: 1) the stocks just got “too far out over their skis”, running up too far too fast. We believe this was based on excessively optimistic projections regarding the pace of federal legalization. 2) More fundamentally, we note that interest rates as measured by the 10-year treasury have increased almost 75 bp in 2021 and the key 2-10 spread, which is an indicator of additional rate increases is now at 1.53%, within 5 bp of its peak since 2016. Increasing rates translate into higher discount rates for stock valuation and this particularly impacts growth stocks like cannabis. 

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis and hemp industry. Each week the Tracker aggregates and analyzed all closed deals and segments each according to key metrics:

• Industry Sector (one of 12 sectors, from Cultivation to Brands)

• Dollar value of the transaction

• Region in which the deal occurred (country or U.S. state)

• Status of the company announcing the transaction (Public vs. Private)

• Deal structure (equity vs. debt)

• Key deal terms (Pricing and Valuation)

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy.

 Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.