Is Another Big Pot Company Deal Coming?

As pot stocks get cheaper, the scene could be set for M&A activity.

Photo by Ravi Roshan on Unsplash

Pot stocks slid further down on Tuesday after six down days. However, the pot stock rout may be good news for acquisition-hungry companies with lots of cash. Sinking share prices are creating the conditions for another big investment or acquisition.

Initially upon its debut on the New York Stock Exchange, Aurora Cannabis Inc. (NYSE: ACB)  (TSX: ACB.TO) shares plummeted 15 percent. Also, this week Canopy Growth Corp. fell 12 percent and Tilray Inc. lost as much as 18 percent. While the broader market was down in trading this week, the cannabis-stock decline began last week on Canadian legalization-eve – Oct. 16.

Short-term supply issues

Problems in the industry include supply issues and low brand awareness. Suppliers ran out of product at both storefronts and online shops in various places across Canada after legalization, leaving some investors concerned about execution and efficiency in the industry. Moreover, Canadian cannabis retailers sold out of 46 per cent of pot products.

Companies with products significantly out of stock included Canopy Growth, which has 144 products total and sold out of roughly half of those. Tilray Inc. doesn’t have licenses to sell cannabis goods in all Canadian provinces. Of its 22 products, over half or sold out in the province is where it is available.  Aurora Cannabis and Aprhia Inc. also sold out many products.

Low brand awareness a concern

Meanwhile, brand awareness is also lacking, as advertising opportunities in the run-up to legalization were finicky for many producers. GMP Securities analyst Martin Landry reported that over 95 percent of customers surveyed across four provinces last week were unaware of the brands they had just purchased, according to GMP Securities analyst Martin Landry.

In conversation with Canada’s national financial newspaper, the Financial Post, chief executive officer of Faircourt Asset Management Charles Taerk said that marketing problems are a major issue for investors. His company manages a $50 million pot-focused fund with the moniker UIT Alternative Health Fund.

“We thought the sector was going to be weaker at the beginning of the month as we slid into Oct. 17 and we were kind of surprised that markets stayed pretty buoyant up until early last week,” Taerk said in an interview, adding that his fund is currently 23 per cent in cash. “Not to say that a correction is ever overdue but we were prepared to a certain degree for some weakness.”

Condition for cannabis company investments might be right

Interestingly, the current climate could benefit investors with patience.  Weakness in the sector could catalyze another big investment. It was as such that Constellation Brands Inc. took its share of Canopy in August after the cannabis company experienced two months of declines.

“It didn’t just happen out of nowhere, Constellation was watching,” Taerk told the Post. “They’re not going to invest when the companies are trading at all-time highs.” The CEO shared that he likes Aphria Inc., CannTrust Holdings Inc. and Organigram Holdings Inc.

Recent M&A activity in the space includes FSD Pharma’s (CSE: HUGE) recent acquisition of Israeli bio-pharma company Therapix Biosciences (NASDAQ: TRPX). Therapix stock was up 28% to $5.68 on news. 

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