Cannabis companies shot the moon on February 10, 2021, and then fell back to Earth. Is the industry burned out, or smoldering for another moonshot?
On February 1, 2021, Senate Majority Leader Chuck Schumer (D-NY) issued a statement with Senator Cory Booker (D-NJ) and Senator Ron Wyden (D-OR) writing, “We are committed to working together to put forward and advance comprehensive cannabis reform legislation that will not only turn the page on this sad chapter in American history, but also undo the devastating consequences of these discriminatory policies.” While not giving an exact timeline, the press release assured Americans that “the Senate will make consideration of these reforms a priority.”
Late last year, on December 4, 2020, The House of Representatives passed the MORE Act, which decriminalized cannabis. (Click to learn more.) The legislation was ridiculed by then Senate Majority Leader Mitch McConnell, and never saw even a puff of consideration.
As legalization became more popular in the halls of Congress, cannabis companies, like our favorites Aphria and Tilray (who liked each other so much they decided to merge on Dec. 18, 2020), began to gain favor again with investors. After sinking to lows of $1.95/share (Aphria) and $2.43 (Tilray) in March of 2020, both companies tripled by the time of the House Decriminalization in early December. On February 10, 2021, a week after the Senate announced that cannabis decriminalization would be a priority, Aphria and Tilray stocks shot the moon, hitting $32.29 and $67 respectively. They remained airborne only briefly, however. The following day, share prices plunged to $16.88/share and $32/share, respectively, having fallen by half.
The February 10th Phenomenon
What happened on February 10th and will it happen again? In the wake of the Senate announcement by Senate Majority Leader Chuck Schumer on February 1, 2021, bulletin board discussions of cannabis stocks soared. One of Reddit’s most popular groups, Wall Street Bets, saw a lot of activity related particularly to Aphria and Tilray, their merger, and the purchase of Sweetwater Brewing by Aphria.
The chatter fueled the rocket to soaring gains for cannabis on February 10, 2021. So, why were the highs so short-lived? Two reasons really. One is valuation. Aphria and Tilray had agreed to merge with a $5 billion valuation. By February 10, 2021, the combined value of the two companies was over $20 billion. (Today the combined value is in the $11.5 billion range.)
The other issue is that, whether by intention or not, Wall Street Bets’ YOLO* meme stocks act like Pump and Dump schemes. Check out the stock performance of other meme stonks below.
Will Cannabis Companies Shoot the Moon Again?
The fundamentals behind many cannabis companies are strong. Not all cannabis companies are created equal, however. For instance, I have yet to see more than a handful of customers in Medmen’s 5th Avenue store in New York City. (I take daily walks for exercise on 5th Avenue.) There will be some that hope to rise with the tide, and others that are sailing with the wind at their back with seasoned navigators and a mother lode of exceptional goods on board. As I mentioned in my blog of December 5, 2020, after the House decriminalized cannabis, Aphria (combined with Tilray) is in the strongest position, particularly after Aphria’s clever purchase of Sweetwater Brewing.
Once we hear a more definitive date for the decriminalization of cannabis in the U.S., you can expect increased investor interest in cannabis. Any rapid rise, however, can be short-lived again, due to profit-taking, the downward pressures of overvaluation and, potentially, general market weakness. (We’re still in the most challenging peacetime economy since the Great Depression.)
The completion of the reverse acquisition of Tilray (which will look more like Aphria in terms of leadership and power) is expected to happen in the 2nd quarter of 2021. Last year’s combined revenue was $685 million – before considering revenue brought in by the Sweetwater Brewing acquisition. Cash burn is still a consideration. Aphria lost -$120.6 million in the 1st quarter of 2021, with $320 million of pro forma cash on hand.
With the expected right-sizing and redundancy trimming that should accompany the merger, the combined cash could be enough to get the company through 2021. However, at the current cash burn, it would be flying a little close to the trees.
The 10X Power of Innovation
In a nascent industry, the company that comes up with the best product can instantly become 10 times more valuable than the competition. Recently we saw that phenomenon with Zoom Video, which beat out Microsoft’s Skype, Facebook Live and Google Chat to become the videoconferencing software most used and beloved. Investors rewarded the company by sending Zoom’s stock to the moon.
All eyes were on CBD Beverages as the next great innovation in the cannabis industry. Sweetwater Brewing has crowned themselves kings of that product line so far with their 420 hemp-based brew… Sweetwater is continuing the trend of name appeal with their limited-release triple-IPA, EFF 2020.
There will likely continue to be extreme volatility in the share prices of cannabis companies. At the same time, with decriminalizing cannabis slated for a vote in the Senate this year, there may be one more investor trip to the moon. If things play out like they did when Canada decriminalized cannabis, then the run-up will be fast and robust before the vote, with share prices crash-landing shortly thereafter. Limit orders may be necessary to ensure that you are on the right side of the trade.
Tilray hit $300/share in September of 2018, just before Canada decriminalized cannabis (on Oct. 17, 2018). By December of 2018, Tilray had dropped to just $70/share. The company continued to slide to a low of $2.43 in March of 2020.
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