Cannabis stock investors are wrong to fear this development – ​​New Cannabis Ventures

You’re reading a copy of this week’s edition of New Cannabis Ventures’ weekly newsletter, which we’ve been publishing since October 2015. The newsletter includes unique information to help our readers stay ahead of the game as well as links to the most important events of the week. news.

Friends,

This week, a big buyer of U.S. cannabis companies over the past two months ran out of funds to continue doing so, and that appeared to weigh on the subsector. AdvisorShares Pure US Cannabis ETF (MSOS), which started seeing massive inflows in November as we discussed earlier, has seen this trend continue into November and even into the new year. The table below shows updates from the one we shared in mid-November, when the number of shares exploded 42% in just seven trading sessions to 38.88 million shares (now 45.3 million):

The manager patiently deployed the funds and maintained high levels of cash until this week, when the fund invested almost all of its remaining cash balance. Here are the cash levels and percentage of cash since 11/12, the time of our previous discussion, when cash was $151 million (now $1 million):

While the $19 million decline over the past week is what seemed to cause traders concern, most liquidity had been depleted the previous week, when liquidity fell from $66 million (5 .9%) to $20 million (1.8%).

MSOS’ deployment of cash appeared to help its core constituents, where most of the money went. The portfolio added three new names (AFC Gamma, Agrify and urban-gro) and sold a small position in cbdMD. Here is the percentage change in shares held by MSOS in each of the names from 10/29 to 01/21:

When thinking about the potential impact on equities, it’s important to understand that the number of shares bought is important, but the number versus free float is even more important. By far the biggest buy among the big names was Verano Holdings (the fund added 5.4 million shares, a 155% increase), and the stock was the best performer among the largest ETF holdings. During this period, the New Cannabis Ventures Global Cannabis Stock Index fell 31.2%, so the big MSOs largely outperformed the market, perhaps in part due to ETF buying:

Now that MSOS has rolled out all of the cash inflows over the past few months, some may worry that this reduction in buying will deflate stocks, which, as noted above, haven’t exactly inflated. We think this is the wrong conclusion. The stocks that were purchased by the ETF reduced the free floats of its constituents. While it is true that a prior source of purchase has ended, this has no direct impact on future prices. If MSOS receives outputs then it will be negative, while if it receives inputs then it will become positive. The current situation is neutral in our view, although it may explain some relative performance of some stocks over the past few months.

Future prices of stocks held by MSOS will depend on underlying fundamentals as well as general investor interest in the space and, to a lesser extent, flows into or out of the ETF. While we haven’t done a full review of ETF share as a percentage of free float or shares outstanding for each constituent, we think that’s really the best way to think about it. Take GTI, for example, the largest holding in the ETF. MSOS owns 7 million shares, or 3.5% of the common shares outstanding and 3% of the common shares after conversion. It’s not particularly significant to us. On the other hand, the ETF holds 10% of Power REIT’s free float, which may explain its very good performance in recent months.

While traders were seemingly discouraged to see the last MSOS money spent, we believe this has more impact on sentiment than actual prices. Cash was seen, mistakenly in our view, as some kind of potential support for equities that would somehow prevent equities from falling. In fact, even spending the money in the past few months as the number of shares rose 65% (about $450 million) hasn’t stopped the shares from falling.

We think another takeaway from the recent rise of MSOS, which currently has $972.5 million in assets under management, is to pay attention to ETFs, which are a major source of equity demand. of cannabis. These ETFs expand the investor audience as they trade on higher exchanges. Last week, we detailed the evolution of cannabis ETFs in a research article that we shared with subscribers to our premium subscription service, 420 Investor. We track 11 ETFs, most of which take very different approaches to each other. MSOS is the largest, and its activity in the market can certainly impact security prices. When sentiment improves in the sector, traders and investors could be well served to follow ETF flows and holdings.


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Truly,

Alain and Joel

Alan Brochstein, CFA

Based in Houston, Alan draws on his experience as the founder of the online community 420 Investor, the cannabis industry’s first and still largest public equity-focused due diligence platform. With his vast network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Prior to focusing on the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as a freelance research analyst after more than two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 on Seeking Alpha, where he has 70,000 subscribers, Alan is a frequent speaker at industry conferences and a frequent source for the media, including the NY Times, Wall Street Journal, Fox Business, and BloombergTV. Contact Alan: Twitter | Facebook | LinkedIn | E-mail

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