4 min read

The Stupid State of Cannabis Stock Listings

When I found out Canadian cannabis companies trade on the NASDAQ and US plant-touching businesses list on the Canadian Stock Exchange (CSE), I was certain I had read it wrong. What could lead to such a strange state of affairs?
The Stupid State of Cannabis Stock Listings
Photo by Nigel Tadyanehondo / Unsplash

One of most perverse parts about cannabis stocks is where they are listed. When I found out Canadian cannabis companies trade on the NASDAQ and US plant-touching businesses list on the Canadian Stock Exchange (CSE), I was certain I had read it wrong. What could lead to such a strange state of affairs?

As with most stupid stuff about cannabis, it goes back to federal illegality. Up until 1937, cannabis was legal and was the fourth most prescribed medicine in the US. This all changed when greedy rich folks banded together and passed the Marihuana Tax Act of 1937 to make cannabis illegal.

Despite all the amazing changes in our society over the last 85 years, it is astounding and unacceptable that cannabis is still illegal and a Schedule One substance. It harms perception, prevents millions from accessing an important medicine and forces US-based cannabis companies to list on foreign exchanges and then dual list in the US on the inferior OTC Exchange.

Trulieve vs Tilray

Trulieve is Florida-based cannabis company and one of the most dominant multi-state operators (MSOs). In 2018 they were seeking capital to expand and turned to the public markets. Since their country of domicile was out the window, Trulieve turned to Canada—where cannabis is federally legal—and received $65.8mm from a reverse takeover of Schyan Exploration Inc, a Canadian mining company. The name was changed to Trulieve Cannabis Corp. and the stock trades on the Canadian Securities Exchange under the symbol “TRUL” and in the US OTC (over-the-counter exchange) under “TCNNF”.

Meanwhile, also in 2018, Canadian cannabis company Tilray debuted on the NASDAQ under the symbol “TLRY”. In a traditional IPO, they sold 9mm shares at $17, raising $153mm and valuing the business at over $1.5b. At the time, Tilray operated in ten countries, but not in the US and this allowed them to secure a listing on a major US exchange.

Cool story, but why does it matter?

Stocks listed on the major US exchanges (NASDAQ and NYSE) have WAY more liquidity and a much larger pool of potential investors. Robinhood, a preferred platform for retail investors, does not offer access to OTC names. You can buy cannabis stocks, but they will be names like Tilray that are not participating in the boom the US is experiencing. Canada has about a population of 38 million, that’s one million less than California about 90% fewer than in the entire US. It’s just not that big of an opportunity. For this reason, and more, we favor the US MSOs.

Accessing the US MSOs requires a broker that allows OTC stocks and doesn’t restrict cannabis names. We built the Green Giants portfolio using Charles Schwab and it’s been excellent thus far. However, effective December 6, 2021, they are going to start charging $6.95 for all OTC trades.

Liquidity is the biggest drawback of the smaller exchanges. To illustrate this, let’s compare Trulieve and Tilray.

Name

Market Cap

Avg Trading Volume

Tilray

$4.9b

23,200,000

Trulieve

$5.2b

456,000

Source: Yahoo Finance

These are both cannabis companies, with almost identical market caps, but Tilray on average trades over 50x more volume. The consequences are meaningful—building a significant position in Tilray will be way easier with the higher volume. Big orders will take less time and get better fills. Plus, daily volatility will be significantly smoother. Earlier today one of our thinner traded names OTC names in the Green Giants portfolio was down -8%. I searched everywhere for news. Nothing. And, by the end of the day it almost fully recovered.

That temporarily punished name traded just 80k shares that day, so it likely was a handful or aggressive sellers (possibly shorting) that pushed the name down. With 50x more volume, this would not have happened and my day would have been way less stressful. Plus, if I was looking to sell earlier in the day I would have gotten a horrible fill and likely pushed the stock down further.

Currently, it is estimated that cannabis is owned 96% by retail investors and 4% by institutions. For perspective, most majors sectors are approximately 50% institutionally owned. The primary driver of the retail-driven market is investment management guidelines prevent almost all institutions from investing in things that are federally illegal. Plus, while most big shops invest in small-cap names, they may be prevented from dabbling in OTC-traded stocks and only touch names listed on the NASDAQ or NYSE. This is why so many big investors own Tilray and do not have exposure to superior stocks like Trulieve.

These conditions are near-term frustrating, but in the long-term enhance the opportunity. Those doing the research to own the right names (US MSOs), find OTC/cannabis friendly brokers and build portfolios today have the potential for massive rewards when things change.

Someday, we’ll see safe banking, federal legalization, institutions will be able to invest, and US cannabis stocks will up list to major exchanges. Volume will jump (50x if the Tilray vs Trulieve example holds) as now everyone is able to invest. Institutional ownership will skyrocket as a new wave of investors are allowed to own US cannabis stocks. Indexes like the Russell 2000 will also add cannabis names. There will be a wave of liquidity to drive share prices higher.

All of the Green Giants positions are well capitalized and continue to execute while trading on inferior exchanges. In Q3 earnings calls, most CEOs mentioned building bigger moats while we wait for safe banking and perhaps federal legalization. The smaller, less capitalized stocks may be at risk, but for the Green Giants it is just a near-term inconvenience and longer-term massive opportunity.

While we wait, we’ll put up with the hassles and invest in one of the fastest growing sectors at extremely compelling valuations. If you are interested in learning about the positions in the portfolio, email us. Also, check out our new Twitter account where we share shorter updates that might not make the main website.