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This week, a large buyer of American cannabis companies over the past two months ran out of funds to continue doing so, and it seemed to weigh on the sub-sector. AdvisorShares Pure US Cannabis ETF (MSOS), which began to see massive inflows in November, as we previously discussed, experienced this trend continue through 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 had exploded by 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 the percentage in cash from 11/12, the time of our prior discussion, when cash was $151 million (now $1 million):
While the $19 million decline during this past week is what seemed to trigger concern among traders, most of the cash had been depleted in the prior week, when cash fell from $66 million (5.9%) to $20 million (1.8%).
Deployment of cash by MSOS appeared to help its largest constituents, where most of the money went. The portfolio added three new names (AFC Gamma, Agrify and urban-gro) and sold one 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 the stocks, it’s important to understand that the number of shares bought is important, but the number relative to the float is even more important. The biggest buying by far among larger names was in Verano Holdings (the fund added 5.4 million shares, an increase of 155%), and the stock was the best performer among the largest holdings in the ETF. During this time-frame, the New Cannabis Ventures Global Cannabis Stock Index fell 31.2%, so the large MSOs substantially outperformed the market, perhaps due in part to the ETF’s buying:
Now that MSOS has deployed all of the cash inflows over the past several months, some may fear that this reduced buying will deflate the stocks, which, as highlighted above, haven’t exactly inflated. We think this is the wrong conclusion. The shares that have been purchased by the ETF have reduced the floats of its constituents. While it is true that a prior source of buying has ended, this has no direct impact on the future prices. If MSOS receives outflows, then it would be negative, while if it receives inflows it will become a positive. The current situation is neutral in our view, though it does explain perhaps some relative performance in certain names over the past few months.
The future prices of the stocks held by MSOS will depend upon the underlying fundamentals as well as overall investor interest in the space and, to a lesser degree, flows into or out of the ETF. While we haven’t conducted a complete review of how much the ETF owns as a percentage of the float or of the shares outstanding for each constituent, we think this is really the best way to think about it. Take GTI, for example, the largest holding in the ETF. MSOS owns 7 million shares, which is 3.5% of the common shares outstanding and 3% of the common shares on an as-converted basis. This isn’t particularly significant in our view. On the other hand, the ETF owns 10% of the float of Power REIT, which may help explain its very strong performance over the past few months.
While traders were apparently disheartened to see the last of the cash in MSOS get spent, we think that this impacts sentiment more than actual prices. The cash was seen, incorrectly in our view, as some sort of potential support for the stocks that would somehow prevent the stocks from falling. In fact, even spending the cash over the past few months as the number of shares increased by 65% (approximately $450 million) didn’t prevent the stocks from declining.
We think another takeaway from the recent ramping up at MSOS, which currently has $972.5 million in assets under management, is to pay attention to the ETFs, which are an important source of demand for cannabis stocks. These ETFs broaden the audience of investors since they trade on higher exchanges. Last week, we detailed the evolution of cannabis ETFs in a research piece we shared with subscribers at our premium subscription service, 420 Investor. We are tracking 11 ETFs, most of which take very different approaches from one another. MSOS is the largest, and its market activity can certainly impact the prices of securities. When sentiment improves in the sector, traders and investors could be well served to track the flows and holdings of the ETFs.
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