Cannabis stocks were mostly lower Wednesday with Green Organic Dutchman sliding 15% after Aurora Cannabis sold its remaining roughly 10% stake in the company at a discount.
Aurora ACB, -1.41% ACB, -2.25%, which is the most widely held of the Canadian licensed producers, liquidated its stake in a block trade conducted at C$3 a share late Tuesday, or about 15% below its closing price. Aurora first invested in the company TGODF, -15.59% TGOD, -16.52% in January of 2018, when it bought 33.3 million shares at $1.65. The company then bought another 6.3 million shares during the company’s initial public offering at $3.65 to bring its stake to about 18%.
“Actions since then though have signaled that this was not to be a long-term relationship; Aurora’s COO stepped down from TGOD’s board in September 2018, Aurora began selling shares in October 2018 (at prices between $5 – $6) which continued into January 2019, and Aurora also allowed a number of its warrants to expire during this period,” Jefferies analyst Ryan Tomkins wrote in a note to clients.
Aurora’s decision to acquire Whistler in a C$175 million deal showed a change of strategic direction. Whistler is a direct competitor of Green Organic Dutchman as on of few producers of organic cannabis. “In conversations we have since had with the company, it has made clear that the Whistler acquisition was instead of TGOD, and therefore an eventual share sale was inevitable,” said Tomkins.
For Aurora, the news is positive as the C$86.5 million offers a needed cash boost to a company that still has not found a major financial backer, while peers like market leader Canopy Growth Corp. CGC, -1.21% WEED, -2.08% and Cronos Corp. CRON, -2.30% CRON, -2.79% have won investments from Constellation Brands Inc. STZ, +0.88% and Altria Group MO, +0.59%.
“This has not been helped in the past by a number of large deals being funded by equity resulting in shareholder dilution,” said Tomkins. Aurora has moved to address that issue, including by increasing the size of its credit facility.
As for Green Organic Dutchman, Jefferies continues to view it as a potential target for a larger LP looking to get exposure to the organic segment, which remains underserved.
“Given we have seen very strong pricing for Whistler products on the market, as well as commentary from TGOD last quarter that it too is attracting strong pricing, this could be attractive as a defense against general price compression as supply continues to increase,” he said.
Aurora was down 0.7%.
Curaleaf CURLF, +1.26% CURA, +0.00%, Cresco Labs CRLBF, +5.26% and Harvest Health HHL, +0.40% HRVSF, +8.98% stocks were bucking the negative trend Wednesday, after Canaccord named them its top picks among multi-state operators as the U.S. sector continues to grow and develop.
In a wide-ranging report, analysts led by Matt Bottomley said the sector might be worth a fresh look for investors as sector valuations have fallen 40% to 50% from their 2019 highs. The selloff has come amid a delay in the approval process for some of the mergers and acquisitions announced this year as the U.S. Justice Department took a closer look for potential antitrust issues. Bottomley said that process was more of an educational one for Justice officials, given how new the legal sector is and said he expects deals to start closing by October.
“Valuations remain attractive relative to Canadian peers,” he said, with the U.S. MSOs trading at an average multiple of 7.9 times 2020 estimated enterprise value/EBITDA, versus Canadian players that are trading at an average 20 times.
“As MSOs on average have access to a greater population base than in Canada, are able to operate more favorable vertically integrated operations in many states, and are closer to achieving (or have achieved) profitability compared to most Canadian LPs, we believe this valuation gap will eventually close,” said the report.
Curaleaf shares rose then shed its gains, after Canaccord named it Top Pick in the sector. Bottomley welcomed its geographic exposure and operating assets, which he said make it the biggest vertically integrated cannabis company in the country, meaning a premium is justified.
Cresco Labs shares were up 3.7% and Harvest health rose 1%.
Aleafia Health shares ALEAF, +0.00% ALEF, -2.86% rose 2.3%, after the Toronto-based company said it has expanded its outdoor cannabis facility by 60 acres with the acquisition of adjacent farmland. The deal closed Tuesday for C$1.2 million in cash.
Elsewhere in the sector, marker leader Canopy Growth was down 2.5%, Cronos CRON, -2.30% CRON, -2.79% was down 3.5%, OrganiGram Holdings’s stock OGI, +0.23% was up 0.7%. and Aphria APHA, +4.01% APHA, +3.11% was up 0.4%. Tilray TLRY, -0.33% was down 7%.
Hexo HEXO, +2.64% was up 0.3%%.
The Horizons Marijuana Life Sciences ETF HMMJ, -1.78% was down 2.4%, with 35 of its 54 member stocks declining. The ETFMG Alternative Harvest ETF MJ, -1.50% was down 2.7%, with 24 of its 36 members falling.