Shares of one of America’s largest cannabis companies is getting slammed today.
Acreage Holdings (CAN:ACRG.U / US:ACRGF) are down more than 11% in midday trading.
The sharp drop in shares of a bellwether U.S. cannabis company has investors, rightly, asking two key questions.
1) Is this drop a sign of things to come for the summer slump in cannabis stocks?
2) Is this a buying opportunity in Acreage Holdings?
The answer to both is NO.
The reason for Acreage’s collapsing share price has very little to do with the overall cannabis stock market or the consistent growth of the U.S. legal cannabis industry.
Instead, Acreage made a move that is going to be a drag on the company’s stock for a while.
Acreage announced a financing deal to get up to $800 million of additional capital in the company.
The deal allows Acreage to issue shares in the company in exchange for investor cash. On the surface, that’s standard in the cannabis sector.
The reason the market reacted so poorly to the news is how the deal is structured.
The type of financing Acreage announced is commonly referred to a “shelf registration.”
This means the company can sell shares directly on the market or through an intermediary brokerage or investment banker who can (and usually will) sell them directly on to the market.
This is less than ideal situation for current shareholders because any rally in Acreage shares will be met with some not one, but two sources of selling.
That’s the key right there – TWO sources of selling.
Investors are going to sell shares. Why would anyone buy in if they didn’t expect to sell at a higher price later right? It is how it is.
The problem here is the company will also be a seller to the tune of up to $800 million.
The resulting situation means that the upside potential in Acreage shares will now be even lower because of the new shares hitting the market and the diluted value of the already issued shares.
Of course, there’s another side to the argument which Acreage would certainly use to spin up a defense of this financing news.
That is the potential infusion of up to $800 million in additional capital will be invaluable at a time when the legal cannabis industry is still young and the battle for market share will have immense long-term rewards.
We at the Seed Investor get that case quite well. It’s not wrong. However, the entire situation is not ideal for a soft market for cannabis stocks.
That’s why we’re not recommending Acreage shares today.
Don’t get us wrong, Acreage shares may go up from here, but with the structure of the financing, the capital appreciation potential is less than what it was yesterday.
And, frankly, there are just so many better bets to make in this summer’s cannabis stock sector where investors can get far greater potential rewards than they can with Acreage shares.
This summer is a great time to reload on cannabis stocks. Focus on those with the biggest potential gains for the next rally. Acreage is not one of the best.