Cannabis stocks are on a major downer. The only good news is that U.S. pot companies are better able to cope with low valuations than they were during the last crunch.
The selloff in riskier stocks has hit U.S. marijuana businesses hard. The AdvisorShares Pure Cannabis ETF, one of the larger funds tracking the sector, is down 22% this year even after a poor 2021. The fund lost almost one-third of its value last year as hopes of marijuana reform in Washington faded.
Weak stocks are tricky for the industry. Big banks won’t lend to pot businesses while the drug remains federally illegal, so they rely heavily on issuing shares to raise funds for expansion and deal making. This option is unappealing now that low share prices would dilute existing shareholders. For the first three weeks of 2022, the value of equity raised by U.S. cannabis companies was down 85% compared with the same period last year, data from Viridian Capital Advisors shows.
The sector has been here before. A stock-market rout in late 2019, caused by worries about growth and a resilient black market, led to a cash shortage. With little access to debt, many marijuana businesses were forced to sell their cultivation sites and lease them back at sky-high rates, or to call off acquisitions already announced.
Two things have changed since: Alternative lenders have stepped in and pot businesses have more cash to tide them over.
Hedge funds, private-equity firms and dedicated cannabis lenders such as Chicago Atlantic Real Estate Finance, which made its market debut on Nasdaq in December, are all competing to lend to the sector, pushing down rates. Although these bounce around depending on who is borrowing, data from Viridian shows that the U.S. cannabis industry’s monthly weighted average cost of debt fell below 10% for six months of 2021. Throughout 2020, the industry’s cost of debt was below 10% for just two months.
Big cultivators such as Green Thumb Industries and Curaleaf also have a cushion after bumper sales during the pandemic. Thanks to a fivefold increase in revenues and fat margins, the top U.S. multistate operators today have on average $341 million of cash on hand, compared with $65 million in 2019, according to cannabis-focused fund SOJE Capital.
That said, the outlook isn’t rosy. Few industry experts expect progress on federal cannabis reform before the November midterm elections. Meanwhile, strong sales reported during the crisis are tailing off as government stimulus ends and normal socializing resumes. Wholesale prices for cannabis are falling in some states and delays in launching recreational sales in newly legal markets like New Jersey could make it harder for companies to hit their growth targets.
U.S. pot stocks are cheaper than ever. Their enterprise values—market value plus debt—are now on average equivalent to 2.1 times projected sales and 7.2 times earnings before interest, taxes, depreciation and amortization, according to Viridian analyst Jon Decourcey. In late 2019, the equivalent multiples were four times sales and 12 times Ebitda. Low valuations for companies with high growth potential reflect the murkiness around if and when U.S. cannabis laws will change.
There may not be much good news for cannabis investors this year, but the sector is healthier than the stock market might suggest.
This story has been published from a wire agency feed without modifications to the text
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