Coronavirus Adds Financial Pressures To Cannabis Industry, Openings For Investors
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As the coronavirus rattles broader stock markets around the world, it is also making it even harder for cannabis companies to raise money from investors in an already-tight funding environment.
But some marijuana financial experts see a possible silver lining for investors: an opportunity to buy, or at least get a chunk of, some companies on the cheap – for those willing to open their checkbooks.
At the moment, however, the cannabis investment climate is anything but favorable for companies in search of funding.Some marijuana firms might not make it
Morgan Paxhia, managing director of San Francisco-based Poseidon Asset Management, said the virus – combined with the existing tight capital climate in the marijuana industry – could potentially result in some MJ businesses going under.
“We’re in the middle of this capital crunch – this Darwin phase, we like to call it. And (coronavirus) is only exacerbating the situation, because it’s just causing uncertainty, just like it’s doing to the broader markets,” Paxhia said.
“We could even see good companies start to fail because their access to capital is getting super tight.”
Paxhia and others said the virus, along with the roller-coaster tumult of all the mainstream stock exchanges, is likely to make investors so wary that they’re selling off most of their holdings until the markets stabilize.
On Wall Street, mainstream stocks tanked Thursday in response to worries about the impact of the coronavirus on the U.S. and world economies.
The Dow Jones Industrial Average tumbled about 970 points, or 3.6%, wiping out much of the previous day’s powerful rally. Other major stock indices also plunged as investors fled to safer assets such as U.S. Treasury securities.
“We saw this back in the financial crisis (of 2008): It didn’t matter if you were Apple or Bear Sterns – your stock was plummeting,” Paxhia said.
Investors retreating further
Capital was already scarce in the cannabis industry because marijuana-sector stocks began plummeting about a year ago, due largely to overly hyped performances sold to investors and under-performance by many publicly traded MJ businesses.
The coronavirus has given that same group of investors no good reason to jump back in, said Matt Karnes, the founder of GreenWave Advisors in New York.
“There’s more and more uncertainty, and that leads to continued jitters. And one thing investors don’t like and that they avoid, it’s uncertainty,” Karnes said.
“Capital is scarce, so any hiccup really will lead to less favorable sentiment around the sector and the likelihood of capital being deployed.
“That being said, I think the public markets are more susceptible to the coronavirus and the impact around it, because it’s short term. We just don’t know how and when it will be resolved.”
Mitch Baruchowitz, managing partner at Merida Capital Partners in New York, said he’d been fielding calls for the past month or so from several investors exploring putting money into the industry.
But in the past week or so, those calls have dried up.
“We’ve been getting a lot of calls from what I’d call professional Wall Street investors who were looking for interesting trades over the last month, and I think the coronavirus kind of took the wind out of those sails,” Baruchowitz said.
But, he said, the industry itself is continuing to improve and expand year after year, so he sees no reason to panic.
“People that are starting to pay attention are looking at the raw numbers of the industry’s potential and feel pretty good about that,” Baruchowitz said.
“The coronavirus – it’s just another log on the fire of skepticism. It’s hard to argue with an industry that has sequential growth of 25% year after year. That’s a massive number.”
For that reason alone, Baruchowitz is confident that after the virus is contained, the temporary shakeout will actually prove a net positive for marijuana companies that can weather the storm.
“Valuations coming down over the intermediate term is likely to bring more value-oriented investors into (the space),” Baruchowitz said.
“There are people interested in the (marijuana industry) now that I did not think would be, because they’re like, ‘All of that easy free money is gone now and you can actually make a fundamental investment.'”
Upside for willing investors
At the same time, some experts see opportunities for cannabis investment.
“It’s very hard to predict macroeconomic shocks on a space that’s kind of its own little ecosystem,” Baruchowitz said.
“The key thing is, it adds to skepticism, but people that are normally interested in cannabis are contrarian in some way, and much of the froth leaving probably will lead to a broader investor base long term, who feel like they’re getting a more realistic valuation in what they’re doing.”
While valuations are starting to come back down to earth from the sky-high projections of 2018 and early 2019, the shakeout has also forced many poorly planned businesses to exit or pivot, and those factors are leading to much favorable return rates for investors at the moment, he said.
Paxhia echoed Baruchowitz’s sentiment, saying his company, Poseidon, is currently building out its investment portfolio even further.
And the timing, he said, couldn’t be better because the return rates “have only gotten stronger.”
“For us, this is amazing. It’s an incredible time to be an investor,” Paxhia said. “We’re just leaning in.
“It means we’re getting very attractive, rational valuations. We’re able to build another portfolio that can generate some really strong return profiles.”
Paxhia said some cannabis companies are pivoting correctly, to broaden their business models out of necessity, and cited the former ancillary technology firm Eaze as an example.
California-based Eaze used to be completely hands-off cannabis and only helped facilitate MJ deliveries through its online platform.
The company didn’t hold any state licenses, as retailers and growers are required to have, but Eaze recently announced a major shift – it’s getting into the plant-touching game.
“A good test of good management is companies that saw this environment unfolding and they changed course, instead of driving the car right off the cliff,” Paxhia said.
“(Eaze is) a perfect example of a company that was burning cash like crazy … and the insiders were like, ‘Either we can lose everything, or we can pivot.'”
As for the coronavirus, Paxhia cited the dot-com bust and the fact that plenty of tech giants are still around and thriving.
“Some of the best companies emerge from crises like these,” Paxhia said.
“These cycles happen, and I think our industry is very different in that aspect, coming back to demand. And I think people aren’t appreciating that enough.
“Even though asset prices are contracting, demand is not, and that is a beautiful equation.”
John Schroyer can be reached at email@example.com