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HIGHLIGHTS
  1. Sundial directors, executives enter voluntary lock-up agreement
  2. North American Marijuana Index falls to November 2017 low, down more than 50 per cent from March 2019
  3. Several Canadian pot companies do not have enough cash for more than six months - Mackie Research

Cannabis share values have been sliced in half to the lowest level in nearly two years as investors wait for some of Canada’s newest companies to start turning a profit, while some see this trough in Canada’s burgeoning industry as a buying opportunity.

Just as many pot stocks extended losses on Tuesday, licensed cannabis producer Sundial Growers Inc. announced its directors and executive officers entered a voluntary lock-up agreement, with 15 per cent of its common shares not set for release until late-February 2020. Calgary-based Sundial’s voluntary lock-up came just two months after it went public on NASDAQ and after its share value fell to US$4.11, roughly a third of its value in early August.

One analyst said a move like this typically demonstrates to investors that company insiders have faith in their stock and confidence in their business.

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“We also plan to approach other significant shareholders about locking up their shares. These actions demonstrate our commitment to building a sustainable industry-leading cannabis company,” said Edward Hellard, executive chairman of Sundial.

The North American Marijuana Index has tumbled more than 50 per cent since March 2019 to the lowest since November 2017. Weakness in cannabis share values is in stark contrast to the 60-per-cent surge that heightened investor appetite just before Canada’s legalization of recreational pot last October, when optimism fuelled the burgeoning industry.

Baron Lee, portfolio manager for Matco Financial Inc. in Calgary, sees the market volatility as a buying opportunity, though he stressed the importance of active management and diversification. Mr. Matco manages a cannabis fund.

“Valuations have contracted and are trading at very attractive levels, levels that are not pricing in growth,” Mr. Lee said.

“For example, on 2020 EV/EBITDA, U.S. multi-state operators are trading at a discount to the alcohol and tobacco industries. Remember, cannabis use is rising while alcohol and tobacco use are falling.”

Earlier this week, GMP Securities said it maintained a “buy” rating on iAnthus Capital Holdings, Inc., but lowered its target price to $5 due to an increase in cost of capital.

Mackie Research Capital Corp. recently noted that nine out of the 50 Canadian cannabis companies it assessed do not have enough cash to last more than six months, and that this number rises to 21 when cash flow burn and capital expenditures are included in the calculations.

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“The most poorly capitalized companies that have the most desperate need of capital, are the ones that are most at risk. They’re still in the process of building out their assets and operations,” said Matthew Pallotta, equity research analyst for Echelon Wealth Partners Inc.

“It’s a signal there’s not a ton of investor appetite to take on risk for these stocks, so there probably isn’t a lot of appetite to go to the market to raise capital.”

Pot companies now need to show investors the growth and free cash flow they are expecting, he said.

“Those that are not able to show those results are starting to get weeded out,” Mr. Pallotta said.

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