Having long been an industry that existed behind the scenes, the cannabis industry is maturing at an extraordinary rate.
Between mid-2017 and mid-2018, pot companies spent most of their efforts on securing funding for capacity expansion, and actually constructing (or acquiring) cultivation farms and processing facilities. Now, marijuana companies have turned their attention to the next most important facet of their development: getting noticed!
Image source: Nasdaq.
Listing on a major U.S. exchange legitimizes the marijuana industry
Since December 2016, 10 marijuana stocks have gone the initial public offering (IPO) route or uplisted from the over-the-counter (OTC) exchange to the New York Stock Exchange (NYSE) or Nasdaq (NASDAQ: NDAQ).
It all began with cannabis-focused real estate investment trust Innovative Industrial Properties becoming the first pot stock to IPO on the NYSE in December 2016. Grower Tilray followed with an IPO on the Nasdaq in mid-July 2018. Just last month, Greenlane Holdings also IPO'd on the Nasdaq.
This leaves seven pot stocks that have, at some point, moved from the OTC exchange to either the NYSE or Nasdaq. Cronos Group first made the move to the Nasdaq in February 2018, with Canopy Growth (NYSE: CGC) becoming the first pot stock to uplist to the NYSE in May 2018. It's worth noting that Canopy Growth would have actually beaten Cronos to a major exchange listing by many months had Constellation Brands not chosen to make a $190 million equity investment into Canopy in October 2017.
Following these two marijuana stocks on to a major U.S. exchange were Aurora Cannabis, Aphria, HEXO, Village Farms, and CannTrust Holdings.
Image source: Getty Images.
Uplisting comes with a number of benefits, but not every company is able to do it
The simple answer is that it dramatically improves visibility, validity, and liquidity. For an industry that's been operating under the table for decades, being listed side by side with century-old companies sends the message that the cannabis industry is here to stay. It also doesn't hurt that volume should pick up substantially, tightening the bid-ask spread and potentially reducing the volatility inherent with most OTC-listed pot stocks.
Perhaps the biggest benefit of being listed on a major exchange is Wall Street coverage. It can be tough to stand out in an increasingly crowded field, and being able to secure coverage, and possibly even an investment, from Wall Street can go a long way to lifting a marijuana stock's valuation. Quite a few institutional investors won't buy into OTC-listed companies.
So, why don't all marijuana stocks uplist if the benefits are so great? Unfortunately, the NYSE and Nasdaq bar listing companies that deal with a federally illicit substance in the United States. Therefore, multistate vertically integrated marijuana companies like MedMen Enterprises, Curaleaf Holdings, and Harvest Health & Recreation, which all sell cannabis in the U.S., aren't eligible for uplisting, unless the federal government changes its tune on marijuana.
Meanwhile, companies like Aurora Cannabis and Canopy Growth don't sell cannabis products in the U.S., but are planning to infiltrate the U.S. hemp and hemp derivatives industry, which became perfectly legal in the U.S. with the passage of the Farm Bill in December.
Image source: Getty Images.
Additionally, uplisting to the NYSE or Nasdaq means meeting a laundry list of financial and regulatory requirements. Even reasonably sized small-cap pot stocks that aren't operating in the U.S. are no lock to meet these requirements.
For example, Aleafia Health has previously applied for listing on the Nasdaq but has run into trouble given its faltering share price, which has briefly fallen below $1 during two separate periods in 2019. The Nasdaq has a minimum share price requirement of $1, meaning Aleafia's management may have to consider an unpopular reverse split -- investors traditionally view reverse splits as a sign of weakness -- if it wants to list on a major exchange.
This is the latest pot stock to get a thumbs-up from the Nasdaq
However, the nail-biting is over for another billion-dollar pot stock that looked to be a shoo-in for listing on a reputable exchange.
On April 29, the Nasdaq received all appropriate paperwork filed by New Brunswick-based OrganiGram Holdings (NASDAQOTH: OGRMF) for listing on the Nasdaq stock exchange. It took just two weeks for the company to receive a response, as noted by a Securities and Exchange Commission filing on May 13. A Nasdaq filing with the Division of Corporation Finance states that OrganiGram has been approved for listing on the stock exchange, and Nasdaq also agrees with OrganiGram in seeking an acceleration of the effective date of the registration. Translation: OrganiGram is headed to the Nasdaq very soon.
Historically, uplisting from the OTC to a major U.S. exchange has led to a notable pop in the underlying share price of a company far more often than not. But it's not about the short-term pop -- it's about what OrganiGram is capable of over the long run.
Image source: Getty Images.
OrganiGram is currently one of the most efficient pot growers in Canada, which is what should get investors excited above all else. Whereas the industry is expected to average approximately 100 grams per square foot in terms of yield, OrganiGram is on track to produce more than twice this level: 231 grams per square foot. The company's 113,000 kilos across 490,000 square feet of cultivation space is possible as a result of employing three tiers of growing space at its Moncton campus. This winds up maximizing the facility's available cultivation space, thereby minimizing growing costs and boosting margins.
There are geographic advantages to be had, too. Although it's not the only grower in New Brunswick -- Canopy Growth's 50,000-sqaure-foot Fredericton facility is on track to produce 5,000 kilos a year -- it is the only major grower to be based in any Atlantic province. While these Atlantic provinces have much smaller populations than, say, Quebec, British Columbia, or Ontario, surveys have shown that adults in the Atlantic-based provinces use cannabis more frequently than the national average. That's great news for OrganiGram, which is also among just a small handful of marijuana stocks to have supply agreements in place with all of Canada's provinces.
The marijuana industry is growing up before our eyes, and OrganiGram is next in line to step into the spotlight.
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Sean Williams owns shares of CannTrust Holdings Inc. The Motley Fool recommends CannTrust Holdings Inc, Constellation Brands, HEXO., Innovative Industrial Properties, Nasdaq, and OrganiGram Holdings. The Motley Fool has a disclosure policy.