Last Week's Cannabis 'Legalization' Stock Rally In Perspective

In last week’s graph of the week, we analyzed US MSO multiples and showed that they are far too low relative to other industries, particularly given their outsized growth potential.  

Our call was answered Friday by freshman GOP congresswoman Mace with her draft legislation of the “State Reform Act.” At worst, the proposed bill is brilliant politics, grabbing hold of the debate and offering a compromise between the “all or nothing” Democratic proposals and the simple de-scheduling favored by many Republicans. The market reacted with enthusiasm, pushing the widely followed AdvisorShares Pure US Cannabis ETF up by 9.5% on the day.

• A bit of perspective is in order, however. The graph shows the results of an investment of $100 in one of three baskets of cannabis stocks on 12/31/20. 

  • The blue line on the graph depicts the performance of a tier-one basket composed of equal dollar weighting of the nine largest MSOs for which we have full-year stock price data.  

  • The orange line depicts the performance of a tier 2 basket composed of eleven companies with less than $500M market cap but over 50,000 shares of average daily volume. 

  • The green line shows the performance of a basket of the seven Canadian LPs with the largest market caps. 

• The obvious question is, where is the rally? Since May, the few upward blips have generally coincided with fresh legalization-related rumors only to fade away in the following weeks. We frankly expect similar results post this rally. The macro picture of slow progress towards federal legalization mixed with difficult third quarter comparisons is likely to make this a good profit-taking opportunity.

• The YTD results are counterintuitive. The Canadian LP basket is the only one that is up for the year with a gain of 2.5%

• The tier 1 MSOs, the darlings of the market, are the worst-performing group, down 25% YTD without a single basket company in positive territory.

• The tier 2 basket (down 14% YTD) shows that it is still a stock pickers market.  MariMed MRMD, the best performer, is up 80%, while the Parent Company GRAM is down 68%.  

• The Viridian Equity Research team published a note on this news today and continues to not expect any legislation until late 2022 at the earliest. We continue to believe careful selection of tier 2 companies offers the best risk/reward tradeoff. 

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

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.