Last week witnessed a significant downturn in cannabis stocks, with the MSOS ETF plummeting by 21.5%. Investors and traders are eager to understand the reasons behind this capitulation, particularly the influence of a less cannabis-friendly Speaker of the House. While the decline did coincide with the change in House leadership, a closer examination suggests that other factors may be at play.
Contrary to popular belief, the Speaker of the House does not have a direct influence on cannabis rescheduling. In fact, discussions surrounding rescheduling actually initiated the previous market rally. Additionally, the SAFER Act, which the Speaker would be involved in passing, enjoys bipartisan support. It is unlikely that a new Speaker would waste political capital opposing such legislation.
Examining the stock price changes from last week, we observed a wide disparity in performance, with Cannabist (CBSTF) experiencing a drastic 53% decline and Ascend (AAWH) recording a notable 13% increase. We sought to identify the variables that explain these divergent outcomes.
Theory 1: Cash Flow and Equity
One hypothesis suggested that companies with limited cash flow available for equity would bear the brunt of downward pressure. We analyzed the net cash flow (EBITDA – Taxes – Interest Expense – CAPEX) as a percentage of Market Cap for each company and compared it to the percentage change in stock prices. Surprisingly, there was no statistically significant relationship between these variables. Cannabist, the worst performer, had a net cash flow that was similar to the best performer, while AYR (AYRWF) had the highest net cash flow to market cap ratio among the three worst performers.
Theory 2: Valuation Multiples
Another theory examined the impact of valuation multiples on stock performance. We analyzed the EV/2024 EBITDA multiple at the beginning of the week but found no compelling correlation. The companies with the highest multiples, Curaleaf (CURLF) and TerrAscend (TRSSF), demonstrated mid-range performance, while the best and worst performers had relatively similar valuation multiples.
Theory 3: Relative Liquidity
Of all the theories tested, relative liquidity emerged as the most predictive factor in stock performance. Interestingly, the stocks with the highest relative liquidity experienced the most significant declines. We measured liquidity using the “Days to Trade the Market Cap” ratio (Mkt cap / average daily dollar volume), represented by the purple line in the graph. The orange line represents the predicted stock price changes based on this ratio. The regression analysis displayed a good fit to the data, with an r-squared value of 0.52 and a significant t score (p<.01). The market favored stocks with lower liquidity relative to their market cap.
It’s essential for investors to understand that trading volume alone does not equate to liquidity. The trading volume should be proportional to the market cap. Additionally, it’s worth noting that in downturns like last week, liquid stocks often underperform as other investors sell off their most liquid holdings.
The insights provided in the “Cannabis Chart Of The Week” stem from data compiled by the Viridian Cannabis Deal Tracker. This database offers comprehensive information on investment trends, valuations, and M&A activities within the legal cannabis, CBD, and psychedelics industries. Tracking over 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value, the Viridian Cannabis Deal Tracker empowers companies, investors, and acquirers with critical market intelligence for strategic decision-making.
Disclaimer: The preceding article is contributed by an external source and does not reflect the opinions of Benzinga. It has been presented in its original form without any edits.