Few events rival the excitement of marijuana stocks either going the initial public offering (IPO) route or going public via a reverse takeover. With the marijuana industry forecast to produce as much as $75 billion in annual sales by the end of the next decade, Wall Street and investors understand that this could be their once-in-a-generation opportunity to take advantage of the growth associated with the green rush. And potentially, the more publicly traded pot stocks there are to choose from, the better chance investors have to make money.
The downside of IPOs: Lockup expirations
Of course, there's a downside to becoming a publicly traded company, namely the dreaded lockup expiration. Securities regulations disallow insiders (e.g., company directors or management) from selling any of their stock for a period of (usually) 180 days following the first day of trading. This is to prevent companies from going public, having management cash out on a large first- or second-day pop, and leaving unsuspecting investors holding the bag, so to speak.
Lockup expirations can be relative nonevents, or, in some instances, they can completely derail a high-flying stock. Since they represent the first opportunity for insiders to lock in gains, it's not uncommon for the expectation of insider selling to push the share price of stocks facing a lockup expiration lower.
During the first half of 2019, close to a half dozen big-name marijuana stocks were expected to face the lockup of a majority of their shares. However, in three of these instances the primary shareholders voluntarily agreed to extend their lockup expiration for a period of six months. In plainer English, the insiders of these marijuana stocks promised not to sell a single share until almost a year had passed since they'd gone public, as opposed to the 180-day mark, when lockup expirations generally occur.
Why voluntarily extend a lockup agreement? The simple answer is that it may help instill confidence in investors that management isn't out for a quick buck, and that it has faith in a company's long-term strategy. All three of the following pot stocks are facing what could still be a very large share lockup in the second half of 2019, and that means investors should be paying attention.
Not long before, Tilray's largest shareholder, private-equity firm Privateer Holdings, which holds nearly 80% of the company's outstanding shares (75 million), had announced that it would voluntarily extend its lockup agreement until the second half of 2019. In other words, Privateer agreed not to sell a single share of Tilray stock until at least July. This move was meant to convey the idea that Privateer believed in Tilray's long-term strategy.
However, Tilray has given up the vast majority of its gains since its IPO. After listing at $17 per share, Tilray shot as high as $300 in mid-September before crashing back to Earth. Following its most recent quarterly report, Tilray's CEO Brendan Kennedy announced that his company would focus on expansion in the United States and Europe moving forward, while deemphasizing Canada. This strategy shift is occurring right as the cannabis industry ramps up in North America, and it's a decision that hasn't sat well with Wall Street or investors. It's also pushed back any chance of recurring profitability until 2021, at the earliest.
Therefore, we have a company with a relatively low float that could see its tradable shares balloon quickly if and when Privateer does decide to lock in gains. That could happen in just over two months' time, and investors should be prepared if it does.
Another pot stock that had the majority of its lockup expiration pushed into the second half of the year is vertically integrated U.S. dispensary operator Trulieve Cannabis (OTC:TCNNF).
Trulieve, which has more than two dozen retail stores open in Florida's burgeoning medical marijuana market, was slated to have 89% of its outstanding shares unlocked on Jan. 25, 2019. But just nine days prior to this date, the company announced that Trulieve's founders had entered into voluntary lockup agreements representing 75.5 million shares of stock that now won't be sold prior to July 25, 2019. All told, this was nearly 69% of Trulieve's outstanding stock at the time of the press release. Said Kim Rivers, CEO of Trulieve:
This extension of the lock-up period is indicative of the confidence that the Company founders have in the vision and execution of our corporate strategy. As we continue with our efforts to bring high-quality products and industry-leading customer service to multiple cannabis markets across the U.S. with the goal of increasing shareholder value, we will also take a responsible approach to managing our share float.
Of course, no matter how much managing is done, it'll be noticed if Trulieve's brass begins locking in gains. On the bright side, though, Trulieve is among a small number of pot stocks that's currently profitable, which may go a long way with Wall Street and shareholders come late July.
Lastly, vertically integrated U.S. dispensary operator Curaleaf Holdings (OTC:CURLF) could be facing a second half of 2019 to forget, depending on what its insiders choose to do with their shares.
Curaleaf, which is the largest dispensary operator by market cap and also has the most open locations, currently, of any publicly traded dispensary, was set to have approximately 85% of its outstanding shares unlock for possible sale this month. But on March 20, the company announced that its founders and other key shareholders had agreed to voluntarily extend the lockup of 249 million subordinate voting shares until Oct. 20, 2019. In total, this represents 81% of the company's outstanding share count.
The theme here is a familiar one: Curaleaf's founders want to send a message to investors that they believe in the long-term execution of the company's strategy and not making a quick buck. Curaleaf has plans to push from around 43 opened stores now to closer to 70 open retail locations by year's end. It's unclear if a big acquisition to boost its physical presence is in the company's future, but it's been a common occurrence in the industry of late, and therefore shouldn't be overlooked.
The big question mark will be whether or not Curaleaf can improve margins on cannabis sales, which checked in at 46% for the full year in 2018. Though losses are likely to continue in 2019, investors may be willing to overlook a large lockup if cannabis margins are decisively moving in the right direction.