Cannabis stocks were mostly lower Monday, with Aurora Cannabis slumping after the company carried out a convertible debt swap that is highly dilutive for its shareholders.
Aurora stock /zigman2/quotes/210559470/composite ACB +2.75% /zigman2/quotes/203734337/delayed CA:ACB +1.96% fell 3.7% after it set the early conversion price for C$230 million ($173 million) of 5% convertible bonds due in March at C$3.28, a discount to the stock’s Friday close of C$3.50.
The Canadian cannabis company said 99% of the holders of the notes have opted for early conversion. Aurora surprised investors when it announced the plan to offer holders of the notes the option to voluntarily convert them into stock at a discount.
“Short term, it’s probably the best-case scenario for Aurora, because it would have been really difficult to raise the amount needed to repay that debt in March,” said Korey Bauer, portfolio manager at the Cannabis Growth Fund from Foothill Capital Management. “But it’s still shocking. Investors need to understand there is going to be more dilutive financing in this market.”
Investors should brace for a cycle of defaults and bankruptcies as the slower-than-expected rollout of legal cannabis in Canada has left the market oversupplied with too little distribution, he said. For growers, the steady decline in pricing is a challenge, while retailers are still competing with a thriving black market that continues to offer cannabis at far lower prices than can be found in the legal market.
The black market remains a major obstacle in some U.S. states, notably California. The Golden State is planning to raise taxes on the legal cannabis industry, according to media reports, a blow to a sector that is struggling to make money. Cannabis stocks have fallen sharply in the past few months as companies continue to report big losses and less-than-stellar revenue.
‘It’s a good time to do a deep dive through the sector and try to pick up high-quality names,” said Bauer.
Bruce Linton, former co-chief executive of market leader Canopy Growth /zigman2/quotes/200603886/composite CGC +2.58% , /zigman2/quotes/202205609/delayed CA:WEED +2.49% said one problem that has hampered the development of the Canadian market is that the early products “were boring.” When cannabis was first legalized last year, only flower and oils were allowed.
“In January, there’ll be a bunch of new products and we’ll see a ramp-up,” he said in an interview for MarketBrief, a new weekly show produced by MarketWatch and sister publication Barron’s. “Now, Canada is a small population, so what you want to look at is products that could be sold elsewhere.”
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Those new products will include cannabis-based drinks, with Canopy announcing early Monday that it has received a Health Canada license for a new beverage facility at its Smith Falls, Ontario-based headquarters. The company will start producing an initial batch of 11 cannabis-infused beverages and will add more later. The company was aided by its main shareholder, Corona beer brewer Constellation Brands /zigman2/quotes/207737284/composite STZ +0.96% , which has invested $4 billion in Canopy. Shares were up 2.1%.
Organigram shares /zigman2/quotes/209289540/composite OGI +4.66% fell 4% after the company reported earnings for its fiscal fourth quarter, with both profit and revenue falling short of consensus estimates.