Why Weedstocks Drop In Price
So you bought some weedstocks, it’s the birth of a new industry how can you go wrong. But now the damn stock is going down, it’s down 10% in a day. Did you make a mistake, buy at the wrong time? Why the hell is it going down when the company will be making huge amounts of money when Canada Legalizes MJ.
What are some of the reasons these stocks drop
There are all kinds of reasons why stocks drop, these are some of the most likely for weedstocks.
The number one most obvious reason these stocks drop is usually due to when you are buying. Did the stock just go up 10-100% in the last month? If yes, than most likely the stock is correcting back down to a more normal rate of growth. Stocks can’t sustain 100% growth month over month. Especially if there is no news. A company may go up due to a good news announcement and that value could stay, but with that amount of change in stock price some investors are going to take profits.
Recently the entire sector was lifted by the Canopy Growth and Constellation news, along with the announced tax rate on MJ. If news from Canopy is driving the prices of other stocks up, do you think they will hold that value. A lot of the growth is based on hype. The news about taxes was seen as good news for the sector and that does add value to the companies, as investors now have a better idea of the profit margin companies will have.
The second reason that I see for share price drop is dilution. When I first started investing in these stocks I didn’t know what dilution was or how it affected the share prices. Dilution is when a companies offers more shares for sale that aren’t currently on the market. These shares are bought from the company instead of other investors. So the company raises money by offering more shares and they usually do this at a discount compared to their current share price. They can also include warrants at different price points.
So lets say a weedstock is trading at $1 and has 100 million shares outstanding. They need some money to pay for an expansion to their greenhouse say 75 million dollars required. They could offer 100 million shares at .75 per share, this would raise the 75 million they required to build that fancy new greenhouse.
But now the stock has 2x as many shares outstanding and nothing has really changed yet. If the share price were to stay at $1 the company would now be worth 200 million market cap. So to adjust for the extra shares and keep the market cap at 100 million the stock would have to go down to .50. The term dilution comes in because your % owner ship in the company just got diluted down to half as much.
These don’t always work out this simple, as raising these funds is good for the company so the stock probably wouldn’t drop in half. A lot of times it will go down to the offering price.
PP Stocks Go Free Trading
Another reason for weedstock to drop in price is when locked up shares become free trading. Initial investors that bought in before the company went public can eventually sell their shares. When a company goes public, this is the private investors ability to get their capital out. This can mean they don’t really care if the price drops a bit when they unload huge amounts of stock. Chuck Rifici had something like 7 million shares of WEED.T when he unloaded them the price dropped.
Upcoming Dilution NINE.V
Delta Nine just came on the market, Bruce Campbell follows the industry closely their fund is an active investor in the sector. Delta Nine has gone from .65 at IPO and is now around $3.00. He mentions that the company has announce that they will be looking to raise money shortly. He is also surprised the stock has gone up so much when dilution will be coming. The good thing about the share price increase is they can sell less shares to raise money, so less dilution. I avoided buying the stock at the IPO as I pointed out in my lessons learned post that the stock usually drops after IPO, maybe the dilution is one of the factors that I didn’t realize.
There are many reasons for stocks to drop in value but these three reasons that seem to affect the MJ industry the most. I found understanding dilution the hardest because I knew nothing about it at first. Are you better off to sell before dilution occurs and buy back in…maybe but how do you know when that is going to occur.