Cannabis Chart Of The Week: It's About Cash Flow And Liquidity, Not Descheduling And Uplisting

The graph shows the indexed prices of baskets of psychedelics stocks and cannabis stocks over the last twelve months.

The orange line shows the broad-based Russell 2000 indexed so that 3/25/22=100.

The blue line shows an equally weighted basket price of the 25 Psychedelics companies in the Viridian Value Tracker database indexed so that 3/25/22 =100.

The green line shows the price of the MSOS ETF indexed so that the price on 3/25/22=100.

Many theories exist about the underperformance of cannabis stocks over the last two years:

The chief culprit mentioned is the failure of the SAFE Act or similar legislation. 

Another reason given is that CSA schedule 1 status prevents cannabis companies from uplisting to senior exchanges like Nasdaq, thereby limiting their liquidity and attractiveness.

A third proposed factor is the pernicious impact of IRS rule 280e, making it difficult for plant-touching companies to become cash positive.

The correlation between the trading pattern of both psychedelic companies and plant touching cannabis companies belies much of these explanations: Many Psychedelic companies trade on Nasdaq. They are not on CSA Schedule 1, nor is their future profitability inhibited by 280e. Still, they trade much more similarly to cannabis companies than to the broad Russell 2000 index, which has outperformed them by over 40 percentage points over the last year.

The poor trading of both sectors goes beyond the factors usually listed. Both cannabis and psychedelics are emerging industries facing continuing stigma and investor doubt regarding their long-term economics. A simple legislative action like SAFE will not easily change these factors. Expecting either of these sectors to outperform in a capital starved, risk-off, likely recessionary period is unrealistic. Investors will need patience and multiple-year time horizons to reap the rewards of what we still believe to be drastic undervaluation.

In the meantime, the only investable companies are ones with either positive cash flow or more than a year of liquidity.

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, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

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.