The cannabis industry needs any sort of catalyst it can get right now. Pot stocks are in what appears to be an almost endless decline. Companies are shutting down facilities and even exiting markets. Investors are reluctant to invest in the industry as the growth days appear to be gone for now and profitability is nowhere in sight for many cannabis producers.
But there's something that could trigger some optimism in the industry, something that could offer a bit of a lifeline to struggling companies. Shares of marijuana multi-state operators (MSOs) may soon be available on a major North American exchange.
TerrAscend to trade on the Toronto Stock Exchange?
TerrAscend (TRSSF 5.32%) is an MSO with operations in Pennsylvania, New Jersey, Maryland, Michigan, and California. The company applied to list on the Toronto Stock Exchange (TSX) earlier this year and recently obtained conditional approval, subject to "certain customary conditions required by the exchange." It would mark the first time an MSO can trade on the TSX.
Since marijuana is federally illegal in the U.S., TerrAscend and other MSOs have resorted to trading on secondary exchanges, like Canada's Canadian Securities Exchange, along with the over-the-counter market in the U.S. That means a smaller pool of investors and can make a big difference when it comes to valuation.
Being on top exchanges has helped Canadian-based Canopy Growth (CGC 2.41%) command a higher premium than MSOs. In addition to the TSX, Canopy Growth also trades on the Nasdaq. Even though it hasn't been a better business than Curaleaf Holdings and Trulieve Cannabis, investors have paid a premium for it in the past:
Data source: YCharts.
That trend has started to change as investors have lost interest in the industry, as a whole, and Canopy Growth's struggles and losses have continued to mount. In its heyday, however, and when cannabis was a hot place to invest in, the company was one of the most popular stocks to buy. If it hadn't traded on top exchanges, that likely wouldn't have been the case.
Could more cannabis stocks hit the TSX?
If TerrAscend is successful in listing on the TSX, it wouldn't be surprising to see other MSOs follow suit. Curaleaf has previously expressed an interest in listing on the TSX, and it would be a great move for other U.S.-based cannabis companies to do the same.
This development would be a positive one for the industry because, in the past, the TSX has taken a hard stance on Canadian companies with interests in U.S. cannabis producers. In 2017, the exchange sent a warning letter to Aphria (which is now part of Tilray Brands) about its interests in the U.S. marijuana industry. At the time, the company had an interest in Liberty Health. While Aphria downplayed the warning, it would go on to divest all of its U.S. cannabis assets by September 2018.
With the TSX appearing to loosen the rules and even allowing an MSO to list on its exchange, the path may potentially be open for more stocks to follow suit.
What this doesn't mean for the cannabis industry
It's a great development for the industry that the TSX is permitting U.S.-based cannabis stocks, but investors should also be careful not to read too much into this. It doesn't mean that legalization is moving forward in the U.S. or that the federal government will lift its ban on marijuana.
It also doesn't mean that MSOs will be able to list on the Nasdaq. That's an entirely different exchange and it recently opposed Canopy Growth's plans to consolidate its U.S. cannabis assets.
Does this make pot stocks better buys?
If TerrAscend and other MSOs list on the TSX, it may help improve their visibility and liquidity but won't ultimately change their underlying businesses. Even if it leads to easier access to capital, it may not necessarily result in stronger growth and profitable operations. Cannabis remains a high-risk industry to invest in, and none of this changes that.
But in the long run, it can help improve the valuations and sales or earnings multiples at which MSOs trade and lessen the gap between Canadian and U.S.-based pot stocks. However, until the industry shows signs of recovery or some sort of growth catalyst emerges, it may be a long time before these stocks recover. Unless you're willing to wait years and accept the high risk that comes along with investing in the cannabis industry, you're better off holding off on pot stocks for now.
