There are a lot of reasons why people sell stocks. But you only buy a stock if you believe the price will go up…
Today, I want to spend some time writing about one of the reasons cannabis stock prices are down – banks and capital markets.
Banks and capital markets firms get their shares on the cheap when a company is still private.
They make direct investments for some of the shares, they get others as payment for services, and they can get even more shares when they control the shells into which so many cannabis companies merge to get a quick listing on a Canadian exchange.
Sometimes these shares are acquired so cheaply that even selling them at prices others consider insanely low reaps a huge profit for those sellers.
And many retail investors, seeing the share price decline brought on by those sales, panic.
Then they sell their shares, sending the prices down further.
But even with prices declining, keep in mind that sellers still need buyers.
So who is buying all these shares that have been coming to market?
Some of the biggest buyers are CEOs, Chief Financial Officers, and influential board members. They have all been snapping up cannabis shares because they believe what we believe.
You don’t have to look far to find examples of company executives snapping up shares.
- Back in July, Acreage Holdings (OTC: ACRGF) CEO Kevin Murphy bought 154,000 shares in the open market for a cool $2 million. I’ve mentioned before that buying Acreage stock was a lower-cost way to buy Canopy Growth Corp. (NYSE: CGC) shares because of Acreage’s coming merger with that company, and Mr. Murphy appears to agree.
- In July and August, iAnthus Capital Holdings Inc. (OTC: ITHUF) Chief Operating Officer (COO), Beth Stavola, added 65,700 shares to her holdings.
- At The Supreme Cannabis Company Inc. (OTC: SPRWF), co-founder and Chief Advocacy Officer, John Fowler, has been selling. But others have been buying. CEO Navdeep Dhaliwal bought 100,000 shares in July and another 30,000 in October. The Chief Financial Officer, just hired in March, bought 125,000 shares in July, and three directors have collectively purchased 116,700 shares in the open market this summer.
These purchases come in addition to existing shareholdings, which are sometimes substantial and in some cases, come on top of new shares acquired by exercising options.
That 67,500 shares that Beth Stavola added may not look like all that much, but she also received 1,969,524 shares when she sold CBD for Life to the company. Mr. Dhaliwal’s purchases brought him to a total holding of 686,486 shares as of September 17.
As I’ve written before, there are many reasons to sell a stock.
Perhaps you think it’s overvalued. Maybe you know it’s undervalued but it’s time to pay for college or a new house or taxes or whatever big expenses pop up in life. Maybe you’ve just got so many shares of one company that some diversification is necessary.
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There are also many ways for executives to increase their shareholdings. They might receive options, or they might get some or all of their bonuses in stock.
But there’s only one reason to buy in the open market.
The One Reason to Buy
You buy stock in the open market when you believe it is undervalued and that, over time, it will go up.
There is no other reason.
When you see executives selling, it’s okay to be suspicious, but also be open to the possibility that there are reasons for the sale unrelated to the executive’s valuation of the stock. When you see buying, there’s no suspicion to be had, particularly if the person already has a big shareholding.
That person is buying because he or she believe the stock will go up.
At some of these companies and at others, executives are also pledging not to sell shares into this market.
That may seem like a no-brainer – this market is too low.
But remember that some of these executives are company founders or joined the company before it went public. Receiving private shares is the best way to build life-changing wealth. Even if a company’s stock is at half or less the level an executive thinks it should be trading at, if that executive bought shares for pennies several years ago, the pressure to monetize just a little bit of that can be immense.
That’s why it’s important when those executives agree not to sell.
Way back in May, the management team for Cresco Labs Inc. (OTC: CRLBF) agreed that none of them will sell shares until at least December of this year.
That $2 million that Murphy put to work in Acreage?
It’s there until at least the closing of the Canopy transaction.
The lockups for Curaleaf Holdings Inc. (OTC: CURLF) were set to expire soon – earlier this week the management agreed to extend the lockup on most of those shares.
There’s not a lot these companies can do about their low stock prices.
Few have the capital to buy back their shares in this market – but with these purchases and lockups, they can prevent new shares from coming to market.
That then sends a signal that they feel prices are too low, and savvy executives can make many times their base pay through share price appreciation when the market turns back up.
Executive Director, National Institute for Cannabis Investors
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8 responses to “There’s Only One Reason to Buy a Cannabis Stock”
October 22 2019