Cannabis Chart Of The Week: Has Trading Liquidity Improved For Marijuana Stocks?

The release of the unredacted text of the HHS recommendation has spurred cannabis equity prices upward. The MSOS ETF MSOS has risen approximately 27% over the last month. But has the pricing strength been accompanied by greater absolute and relative trading volumes?

The graph below shows the aggregate average daily dollar trading volume of the top five U.S. MSOs by market cap (red bars) and the top five Canadian LPs (blue bars). In each case, we added the volume from the primary and secondary exchanges. The U.S. group trades more volume on the OTC than on the CSE. The Canadian LPs trade most of their volume on the Nasdaq with the CSE as the secondary exchange.

The solid red line shows the U.S. Days to Trade Market Cap (DTTMC), while the solid blue line shows this statistic for the Canadian LPs.  Days to Trade Market Cap is our preferred stock liquidity measure, calculated by Market cap divided by average daily dollar trading volume and represents the number of days it would take to trade the entire market cap of the stock.   

The average daily dollar trading volume for the U.S. MSOs was $21M for January to date, up from an average for the period of 16, but not as high as the $41M registered in September after the HHS announcement. Similarly, the days-to-trade value of 474 days is lower (better) than the average of 542 days for the entire period but far from the  238 days recorded in September.  

To understand how relatively illiquid the top MSOs are, consider that if an investor took a 5% position in a stock with a 474 DTTMC, they would need approximately 95 days to trade out of their position, assuming that they wanted to represent less than 25% of the average daily trading volume in the stock. This illiquidity is a considerable impediment to attracting institutional investors. The equivalent figure for the Canadian LPs is six days.

The aggregate market cap of the Canadian LPs in the chart, at $3.3B, is only 31% of the $10.7B figure for the U.S. MSOs, and yet the Canadian average daily volume is 4.5x as high as their U.S. counterparts.

Will rescheduling allow for uplisting to Nasdaq to begin to cure this issue? Sadly, our view is that rescheduling by itself will not be enough. Cannabis will remain federally illegal. No law prevents the Nasdaq from allowing U.S. cannabis listings. Still, we believe it will take a combination of rescheduling, SAFER, and a Garland memo to get the ball rolling on uplisting.

Meanwhile, it is a classic chicken and egg conundrum. Institutional investors won’t come in, given the lack of liquidity, but the liquidity won’t get better until a pool of new capital enters the market.

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.