Cannabis Chart Of The Week: Why Did Stocks Perform So Differently In The Capitulation Last Week?

How can we explain the cataclysmic capitulation in cannabis stock prices last week, with the MSOS ETF down 21.5%? Was it just a reaction to a less cannabis-friendly Speaker of the House? The timing of the decline, beginning in earnest on October 25, does seem to lend some credence to this view. 

However, looking more closely, we are skeptical. The Speaker doesn't directly influence rescheduling, and the talk of rescheduling got the rally started. Furthermore, we have always believed that rescheduling was much more critical than the SAFER Act, which the Speaker would have a role in passing. Also, the SAFER Act seems to have widespread appeal on both sides of the House, and we wonder if a new Speaker would really want to waste political capital opposing such a bill.  

The spread in the percentage price changes last week, shown by the green line on the graph, was dramatic, ranging from Cannabist CBSTF, down 53%, to Ascend AAWH, up 13%. What variables explain the differences?

We tested several theories:

• One theory we had high hopes for was that companies with poor cash flow available for equity would experience more significant downward pressure. We looked at each company's net cash flow (EBITDA-Taxes-Interest Expense-CAPEX) as a percentage of Market Cap and related it to the percentage change in stock prices. The relationship was statistically insignificant for reasons that were easy to see. The worst performer, Cannabist, was quite close to the best performer on the net cash flow variable, and the third worst performer, AYR AYRWF, had the best net cash flow to market cap.  

• Another plausible theory was that companies trading at the highest multiples would fall the most. We tested the EV/2024 EBITDA multiple (at the beginning of the week) to see if it might be a good predictor, which was disappointing. The two highest multiple companies, Curaleaf CURLF and TerrAscend TRSSF had middle-of-the-group performance, while the best and worst performers again had quite similar beginning valuation multiples.

Relative liquidity has the best predictive power of the theories we tested. Ironically, the companies with the highest relative liquidity traded down the most! We looked at the Days to Trade the Market Cap (Mkt cap/ average daily dollar volume), shown by the purple line on the graph, as a predictor of last week's performance. The orange line in the chart shows the predicted stock price changes based on this ratio. The regression offers a good fit to the data with a .52 r-squared and a significant t score (p<.01). The market traded out of the stocks with the most liquidity relative to their market cap.

Investors should know that companies with the highest trading volume are not necessarily the most liquid. $ trading volume should be in proportion to the market cap. Also, investors should be aware that liquidity is not always your friend. Other investors are likely to sell their most liquid holdings, and these stocks often underperform in down markets like last week.

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.