What happened
Marijuana stocks started out the new week on a down note Monday, with shares of Aurora Cannabis (ACB -0.15%) slipping 6%, Cresco Labs (CRLBF 5.13%) sliding 6.2%, and Canopy Growth (CGC 2.41%) down 14.4%.
Unsurprisingly, Canopy Growth is probably the stock that started it all.
So what
This morning, Canopy Growth announced that it will create 22.9 million new Canopy Growth shares and sell them for $1.09 each in a private placement. Investors who paid as much as $1.35 per share for Canopy Growth stock as recently as Friday are understandably perturbed that private investors are getting a chance to buy the stock for a nearly 20% discount.
They may be even less happy to learn that the placement contains an "overallotment" option guaranteeing that, if demand is strong enough, these private investors may be able to buy an additional 22.9 million shares for the same low price. And that each share being sold in this placement will be bundled with a warrant that acts as a free call option enabling the investors to buy an additional share for $1.35 at any time in the next five years.
On the plus side, of course, Canopy Growth stands to gain anywhere from $25 million to $50 million in new funds from the offering -- money that management says it will use for "for working capital and other general corporate purposes." Investors don't seem to think that advantage outweighs the sweetheart nature of the deal terms as described, however, and they're not happy about it.
Now what
Of course, all of the above mainly explains why investors are upset with Canopy Growth today. Why, though, are Cresco Labs and Aurora Cannabis following Canopy stock lower if Canopy is the only stock giving away the store, so to speak?
Well, investors may be extrapolating from Canopy Growth's need for more funds, and calculating that Aurora and Cresco may also need to make similar moves in the future. And they may be right about that.
After all, while Canopy Growth burned more than twice as much cash ($434 million, according to data from S&P Global Market Intelligence) over the past 12 months as did Aurora ($121 million) and Cresco ($21 million) combined, none of these three stocks is currently generating positive free cash flow. All of them are unprofitable.
On the plus side, though, all three of these stocks stand to benefit if the U.S. Congress passes its SAFE Banking Act to legalize banks offering banking services to marijuana companies -- and according to Marijuana Moment, a committee vote to send that bill to the Senate floor for a vote could take place as early as next week. What's more, the bill's Republican sponsor is assuring investors today that "we've got enough votes to get it passed."
Don't be surprised then, if volatile marijuana stocks that are down today start drifting higher again as we get closer to the date of the committee vote. Don't be surprised if these stocks positively rocket again when (or if) it becomes clear that the SAFE Banking Act will become law.
