Big investors keener on cannabis MSOs as rescheduling looms, survey shows

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Institutional investors are increasingly bullish on U.S. cannabis multistate operators, according to a new survey, which suggests marijuana rescheduling by the federal government could convince those big investors to put new money into MSOs.

The group’s sentiment is “more bullish than it was six months ago, mostly because of (the prospect of) rescheduling,” said Frederico Gomes, a cannabis equity analyst with Calgary, Alberta-based ATB Capital Markets and lead author of the report, which surveyed 23 institutional investors between Oct. 23 and Oct. 27.

However, Gomes added, “capital has not really followed that bullish sentiment yet, at least not from an institutional investor perspective.”

Gomes said the group of institutional investors polled by ATB consisted of mostly hedge funds.

Roughly 61% of the group expected that U.S. multistate operators in the cannabis space will beat the S&P 500 over the next year.

The respondents also saw a 75% chance that the U.S. government will move marijuana from Schedule 1 to Schedule 3 within the next 18 months, according to ATB’s report summarizing the poll.

However, most of the group “reported no change or decreased exposure to MSOs over the past six months, which suggests that investors have been burned enough by regulatory false starts and are waiting for an actual rescheduling recommendation” from the U.S. Drug Enforcement Administration, the report noted.

The surveyed investors put at 50% the likelihood of Congress passing of the SAFER Banking Act, which would permit banks and other financial institutions to serve state-legal marijuana businesses without fear of federal retribution.

That 50-50 viewpoint indicates “huge uncertainty,” said Gomes, citing previous failures of the cannabis banking reform legislation and political uncertainty surrounding the new Republican speaker of the U.S. House of Representatives, Mike Johnson.

“They don’t know what’s going to happen,” Gomes added.

“It’s very hard to predict.”

Investment factors

ATB asked the institutional investors to rank the importance of various factors that would boost their willingness to invest more money in MSOs.

Rescheduling marijuana from Schedule 1 to Schedule 3 was the top factor, with nearly 61% of respondents ranking it their No. 1 choice.

By contrast, the group considered the prospect of additional MSO equity uplistings to the Toronto Stock Exchange as “the least important factor” in their willingness to invest more.

ATB also asked the respondents how they would like to see MSOs allocate their capital.

“It’s pretty clear that they want to see MSOs deleveraging, paying down their debt,” said Gomes, adding that investment in organic growth was the second-most-desired behavior from the investors’ point of view.

“Investors are not really looking for (mergers and acquisitions) in the sector,” he added.

“I think that we’ve seen M&A happening, lots of acquisitions, and that did not lead to a lot of value creation.”

Share repurchases were the respondents’ least-desired way for MSOs to allocate capital.

Not bullish on Canada

Despite the respondents’ increasing bullishness on U.S. multistate operators, the investors took a less rosy view of Canadian licensed producers and retailers of cannabis, with 60% expecting those companies to underperform the S&P 500 over the next year.

“While in the U.S. sentiment is driven by regulations, in Canada fundamentals are the biggest driver: poor operating results and shareholder dilution were cited as reasons for investors’ negative view,” the ATB report noted.

Gomes said some respondents skipped answering questions about investment in the Canadian cannabis industry “because they don’t even look at the sector,” demonstrating the difficulty of accessing capital for marijuana companies in that country.

Although all the respondents were “actively interested” in U.S. marijuana MSOs, the ATB report showed that only 52% were interested in Canadian producers and retailers.

However, negative investor sentiment regarding Canada’s regulated cannabis industry “could signify a buying opportunity for contrarian investors,” according to the report.

“Canadian cannabis bulls are close to extinction, which could mark a bottom in the sector.”

Gomes said that “investors have been so burned with everything that happened in Canada, that I think they’re waiting to see if something improves in terms of companies actually being profitable.”

However, “an improvement in fundamentals” could make those investors more willing to open their wallets in Canada, the report pointed out:

“Companies reaching sustainable profitability and positive (free cash flow) was ranked as the most important factor, followed by a reduction in Canadian excise taxes (which would also affect margins and profitability).”

Solomon Israel can be reached at