One of the biggest hurdles for multi-state marijuana companies today is that they can't trade on a major stock exchange due to the U.S. ban on the drug. But a report last week from the industry website MJBizDaily suggests a change may be in the works. If it happens, it might just provide a foot in the door that has been so far closed to U.S. marijuana companies and provide them with access to additional funding from a larger pool of investors.
The report says North American cannabis operator TerrAscend (TRSSF -5.17%) recently applied to list on the Toronto Stock Exchange (TSX). If it's successful, expect some multi-state operators (MSOs) to follow in its path. Here's why.
MSOs rely on secondary exchanges and over-the-counter markets for funding
If you're buying shares of a cannabis company that's listed on the Nasdaq Composite, odds are it's a Canadian-based marijuana business (since pot is legal there). MSOs that operate in the U.S. aren't able to trade on a major exchange like the Nasdaq or even the TSX, because they can run afoul of U.S. laws. These stocks for these companies are more likely to be found either on an over-the-counter exchange or the Canadian Securities Exchange, a less popular option than the TSX.
The problem is that it means the company has access to a smaller pool of potential investors as many institutional and retail investors avoid these exchanges. That helps explain why stocks that trade on a major exchange, such as Tilray Brands and Canopy Growth (CGC 1.28%) (WEED), often fetch higher price-to-sales multiples than U.S.-based pot stocks.
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Is the TSX's stance changing?
In 2017, there were reports that the TSX sent out warning letters to Canadian cannabis companies just for having invested in U.S. cannabis businesses, saying that by doing so, their shares could become delisted.
This is in stark contrast to the recent news that the TSX is apparently OK with Canopy Growth's plans to set up Canopy USA to house its U.S.-based investments and to potentially consolidate them. The Nasdaq is opposed to the plan, but the TSX appears to be OK with the move. For MSOs, that's a potentially welcome change that could pave the way for them to list on the top Canadian exchange in the future.
TerrAscend is one of the companies that Canopy USA has conditional ownership in. Late last year, Canopy USA converted $125.5 million of TerrAscend's debt into exchangeable shares. If it also converts warrants, Canopy USA could own more than 23% of the MSO.
If TerrAscend is able to list on the TSX, it would be a big milestone for MSOs, and could lead to a wave of other U.S. marijuana companies following suit. While it wouldn't necessarily mean anything for the prospects of getting onto the Nasdaq or New York Stock Exchange, it would at the very least help inject some liquidity and potentially attract more investors into the mix.
Does this mean now is the time to buy shares of MSOs?
Marijuana stocks haven't made good investments. Many have been crashing over the past year, and they're likely to continue to struggle amid inflation and a possible recession this year. The earliest I would expect marijuana stocks to potentially be hot buys again is in the latter half of next year, just before the next U.S. presidential election. But that may only be a temporary boost for the industry.
Until nationwide marijuana legalization in the U.S. takes place (which, even in a best-case scenario, could be years away from happening), it'll likely remain a bumpy road for investors. And even then, there are no guarantees of a boost. Many cannabis businesses are still largely unprofitable and struggling to generate growth. Legalization might provide a short-term boost from speculators, but it will also lead to increased competition for what might not end up being a much bigger potential market than what already exists.
Unless you are confident that you can afford to invest money into risky pot stocks and hold it there for years, you may be better off waiting on the sidelines for now.
