Cannabis stocks plunge on election results
As the outcome of the US presidential election and numerous state-specific cannabis ballots dripped through yesterday, the markets reacted in tandem.
Cannabis stocks from both the US and Canada fell off a cliff on Wednesday (November 06), with analysts suggesting the negative reaction is primarily due to the failure of Florida’s legalisation initiative.
New Cannabis Venture’s American Cannabis Operator Index, which tracks the stock price of the 12 largest US cannabis operators, plummeted by 25% as markets opened and have so far failed to recover meaningfully. Its Canadian index followed a similar trend, dropping 10% on Wednesday.
Floridian operators like Trulieve bore the brunt, seeing its stock price fall by over 40% at market open.
Trulieve, Florida’s largest medical cannabis operator, had effectively bankrolled the initiative, providing nearly $145m of the total $153 spent on the legalisation campaign.
This also had a major impact on AdvisorShares Pure US Cannabis ETF, in which Trulieve has the second biggest weighting, seeing the ETF fall 25%.
Similarly, Ayr Wellness, which has also invested heavily in the state, saw its stock drop by over 50%.
Ayr Wellness, which has been investing in expansion and new facilities, including a major indoor cultivation facility planned for 2025, is also now expected to face challenges in leveraging these investments without recreational legalisation.
According to ATB Capital Partners’ Florida’s legalisation vote was ‘the major anticipated catalyst for MSOs in 2024’.
ATB Capital Markets analysts foresee a significant drop in market sentiment, which could negatively impact MSO stock valuations. Currently, Tier 1 MSOs are trading at a next-twelve-months EV/EBITDA multiple of 6.4x, but the report indicates this could drop to around 5.5x as sentiment bottoms out.
With Florida legalisation off the table, ATB analysts suggest that MSOs may shift focus back to fundamental performance indicators, like balance sheets and cash flow. Investors are likely to gravitate toward top operators like Green Thumb Industries and Verano, who are generating substantial free cash flow and have maintained stable financial health.
Viridian Capital Advisors also believe this result is likely to have cost cannabis companies an incremental $2-3bn run rate in revenues.
At 30%ish EBITDA margins, this is a $1B EBITDA hit and at 5x somewhere around a $5B potential market cap hit.
Looking beyond state-level developments, the next potential boost for the sector is expected to be the federal rescheduling of cannabis, which could occur in 2025.
Meanwhile, the US stock market more generally has rallied on the news of another Trump presidency, with the SNP rising 1.7% amid anticipation of lower taxes and higher interest rates.
As for cannabis stocks, the reaction to Trump’s victory is more mixed. Analysis from Cabot Wealth questions ‘how sincere Trump is about cannabis reform’.
Democrats have accused Trump of pandering to cannabis advocates purely to win votes, but his explicit backing of Amendment 3 in Florida may suggest he is sincere.
“His desire to see more medical research suggests that, like President Joe Biden, Trump would pressure the Drug Enforcement Administration and Department of Justice to reschedule. In short, rescheduling seems derisked because Trump and Harris favor it.”
Speaking to Market Watch, Alliance Global Partners reaffirmed the view that the recently delayed cannabis rescheduling is now the ‘most likely federal catalyst’ for cannabis stocks.
“We will be keeping an eye on who Trump appoints as Attorney General along with who takes over as Republican Senate Majority Leader with Sen. Mitch McConnell retiring — and we view a more moderate person in both positions being more favorable to cannabis reform.”
DanCann Pharma
Danish medical cannabis operator DanCann Pharma saw its stock drop by around 30% this week, after pushing through its capital reduction strategy.
In September, Business of Cannabis reported that, following a longstanding depression of its share price, DanCann announced plans to reduce its share capital from approximately DKK 15.4 million to DKK 1.5 million. This will be achieved by reducing the nominal value of each share from DKK 0.01 to DKK 0.001.
The reduced capital amount will be transferred to a special reserve fund, meaning the capital reduction doesn’t result in money being paid out to shareholders but instead being held in this reserve for the company’s future use. This allows the company more flexibility in its financial operations, as these funds become distributable and can be used for future investments or other purposes.
The company explained: “This reduction, and especially the proposal to reduce the company’s nominal share capital by transferring the amount to a special reserve fund, is intended to facilitate the previously announced reverse stock split, aimed at stabilising the trading of the Company’s shares.”
DanCann has now completed a reduction of its share capital, effective November 5, 2024. The move, approved by shareholders at an extraordinary general meeting on October 7, means that the total number of outstanding shares remains unchanged at 1,541,101,234.
Shareholders will retain their existing holdings, with the only difference being a ten-fold decrease in the nominal value of each share, from DKK 0.01 to DKK 0.001.
Prior to the reduction, the company notified its creditors and allowed a four-week period for any objections. With no claims filed, the reduction was formally registered with the Danish Business Authority, bringing the process to a close.
Stenocare
Its Danish stablemate Stenocare lowered its sales forecasts for a second time in three months ‘based on actual market performance’ in mid-October.
Now, the company has published its Q3 results, shedding some light on the companies financial situation and giving some deeper context in relation to its reduced forecasts.
Stenocare reported a challenging Q3 with gross sales plummeting 53% to DKK 1.1m, due to increased competition and slower-than-expected market growth. Net sales were further impacted by DKK 2m in returns of expired products, primarily from the Danish market, resulting in a net loss of DKK 0.9m.
To weather the current market storm, Stenocare has initiated multiple liquidity-preserving measures to address immediate cash flow needs. This includes reducing operational expenses, optimising supply chain costs, and deferring some non-essential investment financing options.
As such, Stenocare has managed to reduce its operational expenses by 26% to DKK 3m, optimising its cost structure. However, the company’s cash position remains low at DKK 0.1 million, with expectations that it will announce a plan for future funding soon.
Despite these short-term challenges, Stenocare is poised for potential long-term growth with the upcoming launch of its innovative Astrum Oil product, approved for sale in Australia and Germany. Astrum Oil boasts several benefits over existing medical cannabis oils, including faster and more uniform uptake in the blood.
