Recent survey results show a growing optimism among institutional investors towards U.S. cannabis multistate operators (MSOs). The positive sentiment is especially notable today compared to six months ago when the outlook was less rosy. Frederico Gomes, a cannabis equity analyst at ATB Capital Markets and lead author of the report, suggests that if the federal government reclassified marijuana, these investors could very well inject new funds into MSOs. However, despite their increased positivity towards MSOs, institutional investor capital has yet to follow suit due to regulatory uncertainties.
No Sudden Shifts in Exposure
Among the institutional investors surveyed, the vast majority reported no change or decreased exposure to MSOs over the past six months. This caution likely stems from worries about regulatory developments and anticipation of a recommendation from the U.S. Drug Enforcement Administration for rescheduling. While some may be holding off on investment due to an unclear trajectory, others are specifically seeking out more mature companies with less risk associated with them.
Investing Instead of Share Repurchase
The report also reveals institutional investors’ desire for MSOs to prioritize debt repayment and organic growth over share repurchases. By investing directly in company development and building out operations, these businesses can put themselves in a better position to succeed long-term. Of course, managing debt responsibly remains critical to safeguarding against potential risks down the line.
Less Enthusiasm Towards Canadian Producers and Retailers
While US-based MSOs are enjoying newfound confidence from institutional investors, their Canadian counterparts aren’t faring quite as well. In fact, 60% of respondents claimed to expect Canadian cannabis companies to underperform compared to the S&P 500 over the next year. Poor operating results and shareholder dilution seem to be the primary factors causing this negative outlook for Canada’s regulated cannabis industry.
A Buying Opportunity?
Interestingly enough, the report suggests that such widespread negativity may actually present a buying opportunity for contrarian investors. Improvements in industry fundamentals like sustainable profitability and positive cash flow offer the potential for accelerated growth—particularly if savvy buyers get in early. It remains to be seen whether institutional investor sentiment will shift towards Canadian businesses, but it’s an intriguing development to watch unfold.
Marijuana Regulation Still Drives Decision-Making
The survey highlights just how much weight is placed on federal marijuana rescheduling when it comes to institutional investor decision-making. As prospects for nationwide legalization remain uncertain, activity within the cannabis market—particularly for MSOs—is likely to be heavily influenced by any progress (or lack thereof) made on the legislative front.
Some have speculated that continued state-level legalization efforts could serve as catalysts for broader change, opening up new opportunities for MSOs across the United States. On the other hand, a lack of meaningful reform at the federal level does place pressure on these operators to prove their viability outside of current legal bounds. With no guarantee that future administrations will prioritize cannabis legalization or decriminalization, finding ways to thrive now can be a wise move for MSOs.
Ultimately, the growing optimism among institutional investors for U.S. cannabis MSOs paints a cautiously promising picture. While many are eagerly awaiting movement from the federal government on marijuana regulation before placing their bets, this newfound confidence could mark a turning point for the industry. As MSOs address concerns about debt repayment and organic growth, and Canadian producers and retailers work to overcome their unfavorable position, the stage is set for some big developments in the world of cannabis investment.