With a wave of IPOs in the second half of 2018, the quality of the companies tracked in the proprietary NICI Indices has improved.
Our exclusive trio of NICI Indices, which we developed to be the most accurate measures of the cannabis industry, underwent their first quarterly reallocation on January 1, 2019. In doing so, it reflects the huge changes to and the continuing maturation of the cannabis industry.
Now we’ve got six months of data, and having more historical data only adds to the value of these indices for investors like you. So, expect to hear more about the NICI 50, the NICI U.S. Index, and the NICI Health and Wellness Index. For now, let’s talk about the big changes the indices received on January 1.
The biggest trend to notice is how many additional, high-quality cannabis companies have moved from private status to publicly traded.
As I’ve been predicting, U.S. companies are starting to get in on some of the action Canadian companies were best known for in 2017 and especially 2018. It’s in part because of the rapid rise in quality of the Canadian Securities Exchange (CSE) and willingness to allow U.S.-based companies to be listed there.
Regardless, these newly public companies’ impact over the last six months is impossible to ignore, especially on the NICI U.S. Index.
Here is what’s happening…
The Face of Cannabis Is Constantly Changing, And in a Hurry
The NICI indices “rebalance” daily – that means that each company’s value is reset to a constant percent of each index at the end of each day. The result of the daily rebalancing is that one outlier can’t move the index very much on its own the way a tiny number of expensive stocks push the S&P 500. Small companies and large companies have the same influence on our indices each day.
But the indices only “reallocate” quarterly. That means at the end of each quarter, we look at all cannabis stocks and reconstruct each index using our construction rules. My research team and I add companies that meet the listing criteria and we remove companies which no longer qualify.
As I touched on earlier, the second half of 2018 saw a lot of changes to the public cannabis market, mostly IPOs from American companies. That means that over 40% of the NICI 50 – 21 out of 50 companies – are new to the index this quarter. And 40% of the companies which were in the index, which tracks the largest companies in the industry regardless of segment, on December 31 are now out.
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New companies in the NICI 50 include instant industry giants like Acreage Holdings, Cresco Labs, and Tilray Inc., as well as upstarts like New Age Beverages Corp. Companies which left the index are smaller ones, including Isodiol International Inc., Namaste Technologies Inc., and Terra Tech Corp.
Many of those departures have very low ratings in our exclusive NICILytics Database ratings system, which is available to our Cannabis Investor’s Report lifetime-level members. They’re unlikely to ever be successful companies.
That means the quality of the companies in the NICI 50 has inherently increased. The average NICILytics rating of companies in the index is now a 3.3 (out of a maximum rating of 5), up from 3.1 before the reallocation.
The NICI U.S. Index underwent a similar change thanks in part to companies that IPO’d of late. No names were removed from the U.S. Index, but 16 companies that did not previously qualify for inclusion made it this quarter. That more than doubles the size of this index’s holdings.
At any rate, new names in the NICI U.S. Index include some of those giants I mentioned, like Acreage and Cresco. It also now includes CBD product leader Charlotte’s Web Holdings Inc., and Arena Pharmaceuticals Inc.
Reflecting the high quality of IPOs during the past six months, the NICI U.S. Index had a drastic increase in quality. The average NICILytics rating of the companies in the NICI U.S. Index increased from 2.9 to 3.4.
Finally, the NICI Health and Wellness Index had the fewest changes. We added five companies and removed two due to their small market capitalizations. If a company is both in the health and recreational markets, we classify them on the recreational side. Emerald Health Therapeutics Inc., for example, is overwhelmingly a health-oriented company, but because it sells to the recreational market, too, we classify it outside of the Health and Wellness Index.
As we go forward, it will become increasingly difficult to make the distinction between a health and wellness company and a company with a more general appeal. The pure pharmaceutical companies will be easy enough to classify, but what will happen when some of the CBD companies start partnering with companies like Coca-Cola?
Regardless of the direction, we’ll keep you updated on how our indices – like the industry, in general – is evolving.
And as I mentioned, the indices are starting to gain value as they track longer periods, so expect to hear a lot more about them in the future.
Thank you for being an important part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors
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January 08 2019