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  • Writer's pictureAdastra

Cannabis Investing 4: Gladiators, Senators, the Colosseum and the Senate

Updated: Nov 13, 2023

Alea iacta est [Latin]

The die is cast

- Julius Caesar

I have always been fascinated by the Roman empire. I enjoy watching movies and TV shows based in the era. Shakespeare’s Julius Caesar will always be my favorite play. And The Gladiator has got to be one of the greatest movies ever made.

Ancient Rome was a class based society. The aristocrats owned most wealth and property. At the top of the pyramid were the senators, who got to run the empire. At the bottom of the pyramid were the plebeians (also called plebs), and at the lowest were the slaves. The most famous of these were the gladiators, who fought for survival in the Colosseum for the entertainment of the elites and masses. The best they could aim for was to achieve greatness and hence their own freedom.

Cannabis stocks are similar. The senators are the stocks that are listed on the Nasdaq/NYSE (the Senate). The gladiators are the stocks listed in the dog eat dog OTC exchange (the Colosseum).

This is my thesis based on the analysis of relative valuations during the cannabis sector bull markets of 2018 (during Canada’s legalization of cannabis) and 2021 (when the Democrats came into power promising Cannabis decriminalization and progress on legalization). The valuation metric used for comparison is the Price to Sales (PS) Ratio, with higher ratios indicating higher valuations.

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An analysis of the astronomical PS Ratios seen in the previous bull markets is presented in the Historic Bull Market Valuations page, along with charts for the stocks analyzed. The following summary table presents data from showing historical PS ratios for Cannabis stocks selected for this blog. A huge thank you to YCharts for giving me permission to share this data.

I acknowledge this is a lot of data. But what is the narrative behind these numbers?

The main point is that Cannabis is a very volatile sector. During a bull market the stocks get very high valuations in the double-digit PS ratios. During bear markets, like right now, the valuations get ridiculously low. The table compares the better-known Canadian Cannabis Licensed Producers (LPs) listed on Nasdaq, with those with a retail component like the US Multi State Operators (MSOs) listed on the OTC exchange.

Whether you look at the peak PS of the 2021 bull run (Feb 10, 2021), the Max, Average or Median PS of a 5 year period, the consistent trend is the premium awarded to stocks listed on the Nasdaq (the Senate) vs OTC exchange (the Colosseum).

Depending on the metric, the premium of being on Nasdaq vs. OTC can be anywhere from 250% to 1000%+. This is plain and simple discrimination against good companies who just happen to be listed on the OTC. They are excluded by many institutional investors and hence miss out on the best gains during a bull market.

High Tide was on the OTC in Feb 2021 and missed out on the rally. A few months later it was the first retail-focused cannabis company to be listed on Nasdaq. This is like a gladiator getting into the Senate. For now the US MSOs are still stuck in the Colosseum. These include Trulieve Cannabis, Green Thumb Industries, and Curaleaf, which have detailed analysis in the STOCKS category of this blog. There is a good probability that legislation to have them uplisted will be passed at some future date, we just don’t know when. But when they do migrate from the OTC to the Nasdaq, the data indicates that they too will benefit from the Nasdaq premium. In time, more vertically integrated cannabis “gladiators” will gain their freedom from the Colosseum (OTC) and earn their rightful place as senators in the Senate (Nasdaq/NYSE).

Nobody can predict when the next bull market will come. But PS valuations below 5 make cannabis stocks a compelling investment, given the growth delivered in past quarterly results and the future growth of the industry. Investors have a good probability of making impressive gains if they invest when valuations are low and hold till bull market valuations of 10+ PS, or even potentially 20+ if the sector gets hype in addition to fundamentals. Both past cannabis bull markets predict that double digit PS valuations are high probability during the next cannabis bull market.

Why do OTC listed stocks (gladiators) underperform Nasdaq listed stocks (senators) even with stronger relative fundamentals?

Multiple reasons come to mind. The main one would be that most institutional investors cannot invest in US stocks that “touch the plant”, these include the US MSOs. Hence these stocks are currently missing out on the vast majority of institutional investing and trading activity. As institutions cannot invest, they also lack the incentive to promote these gladiators. Hence you see the logic defying phenomenon of mainstream media showing Nasdaq stock tickers of Canadian producers when there is news related to US legalization, and interviews with the CEOs of these companies which have limited revenues from the US and won’t be the ones to benefit the most from US legalization.

The other reason would be that with the big institutions out of the picture, the volumes for these stocks are low. These make them easy to manipulate. You often see very sharp price decreases orchestrated on very low volumes. The setup favors market makers, hedge funds and traders who profit from short selling, algorithmic trading, dark pool trading and other means not available to retail investors. This manipulation is often accompanied by coordinated efforts to decrease investor sentiment via Fear, Uncertainty and Doubt (FUD) posts on social media platforms. Over time, retail investors get frustrated and sell their shares, leading to the transfer of shares from retail investors to financial players with greater means. Unfortunately, there is not much regulation to protect retail investors from this manipulation. In a better world, short selling, algorithmic trading and dark pool trading would be abolished, for these don’t add any value to society and only worsen the problem of income inequality we see in the world.

The Senate (Nasdaq) vs Colosseum (OTC) analogy applies not just to cannabis stocks but also to cannabis Exchange Traded Funds (ETFs). ETFs are an alternative to individual stock investing that has grown in popularity over the last two decades. The biggest two Cannabis ETFs measured by Assets Under Management (AUM) are the Advisorshares MSOS ETF and the ETFMG Alternative Harvest MJ ETF. The MSOS ETF is heavily invested in OTC listed gladiators, including Trulieve Cannabis, Green Thumb Industries, Curaleaf, and other US MSOs. The MJ ETF is heavily invested in Nasdaq listed senators, including the large Canadian producers like Tilray and other companies analyzed in this blog including WM Technology and High Tide. Detailed analysis is provided in the Cannabis ETF Analysis: Cannabis Stocks with highest % of Market Cap Owned by the large Cannabis ETFs page in the ANALYSIS category.

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Disclosure: I (username Adastra) am an investor not a trader. I am bullish on the Cannabis sector as a long-term investment (2026 and beyond), provided stocks/ETFs are carefully picked based on data-driven due diligence. Of the 16 stocks covered in the Best Cannabis Stocks analysis, I have invested only in my top 3 picks: High Tide, Green Thumb and Curaleaf. But my analysis indicates (without any guarantees) that there is a potential for impressive gains in investing in the stocks best ranked in the analysis, including WM Technology, and Trulieve, which have a dedicated page with detailed analysis in the STOCKS category. I reserve the right to buy or sell at any time any of the stocks mentioned in this blog. I do not short stocks and never will short any stock in a company that makes the world a better place. I do not have insider knowledge of any company covered in this blog. All data used for analysis is from public sources. I have received (as of last update date of this page) ZERO funding for this blog from any of the companies featured in this blog.


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