Canadian pot producer Canopy Growth Corp. was left in the dust as investors rushed to buy cannabis equities this week. The S&P/TSX Composite Index is on track to achieve its best week since late May as markets rose amid optimism that global economies may be able to weather a recession even if interest rates rise.
It was not enough to raise Canopy out of its self-inflicted slump, despite the enhanced risk perception. The ETFMG Alternative Harvest ETF gained more than 2% this week, despite a 7.4 per cent drop in the company’s stock. Tilray Brands Inc., a Canadian pot company, saw its best week since March with a 10% gain.
In the wake of the midterm elections, Green Thumb Industries Inc. and Trulive Cannabis Corp. saw their stock prices rise by 16 per cent and 3.5 per cent, respectively. Canopy’s stock price dropped 18 per cent on June 30 as a result of investor dissatisfaction with the company’s decision to swap debt for a combination of shares and cash.
A C$255.4 million loan and a C$3 share swap are part of the strategy. Boost the principal shareholder, Constellation Brands Inc., by converting its equity position into cash, including accrued and unpaid interest. According to Canaccord Genuity analyst Matt Bottomley, the deal reduced Canopy’s share count by 20 per cent, which is a “great cost to shareholders.”
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According to Bottomley, “the more dilution rate, the more panicked investors fear or think it is not the right moment to keep a stock.
In the current market, there is a possibility that the fully diluted share count will continue to climb until all of the debt is paid off or converted. ”
There has been an increase in negative sentiment from analysts and credit rating organizations. Since the end of June, at least four different brokerages, including Cantor Fitzgerald and CIBC Capital Markets, have cut their price targets. The second cut in less than a week came from Fitch Ratings, which lowered Canopy’s rating to “C” on Tuesday, citing a troubled debt swap.
With its downgrade to selective default (CCC to SD) announced on Wednesday, S&P Global Ratings joined the chorus of critics who feel the swap is “a distressed exchange and tantamount to default” because noteholders may receive less than what was pledged when the original loan was issued. Pot stocks tend to trade in tandem with tech stocks and risk sentiment, which has been hampered by fears that central bank attempts to restrict growth rates to stave off bullish momentum could lead to a recession.
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Stocks of marijuana have also been impacted by the slowness with which the US market has been opened. Canopy Growth, on the other hand, is down 69 per cent this year, reducing its average price target by nearly two-thirds and increasing the number of analysts with a sell rating to 11, which There are more than just buy and hold ratings combined.
