There's been a huge amount of interest in marijuana stocks recently, with the big boosts in share prices across the industry playing a leading role in getting investors' attention. When you look at the top cannabis companies in the business, you'll find an elite group of individuals at their helms. These CEOs are highly optimistic about the future of their respective companies, and they've worked hard to stand out from the crowd and explain how they can stay ahead of their competitors.
In evaluating any stock, a smart thing to look at is whether corporate insiders own significant interests in their companies. Especially with small companies in relatively new businesses, you'll often find CEOs with an entrepreneurial spirit who've held onto a substantial stake in their companies. That guarantees that their interests will be aligned with shareholders, and that's a positive for someone considering buying a stock.
With cannabis companies, an initial glance might leave you thinking that CEOs don't have that confidence in their companies. A closer look leads to a different answer -- but some tend to own their holdings indirectly.
Image source: Getty Images.
A disconnect between words and actions?
There's no question that across the marijuana business, CEOs are excited about the prospects for their companies and for the industry as a whole. Just consider what these executives have said:
- Terry Booth, Aurora Cannabis (NYSE: ACB): "Aurora is strategically positioned across the entire cannabis industry value chain to further extend our rapid growth."
- Michael Gorenstein, Cronos Group (NASDAQ: CRON): "This is an opportunity we won't see again. I won't say once in a lifetime but in multiple lifetimes."
- Sebastian St.-Louis, Hexo (NYSEMKT: HEXO): "We are making history without company and as an industry."
- Brendan Kennedy, Tilray (NASDAQ: TLRY): "I think you will see three companies with $100 billion valuations, and we would like to be one of them."
- Bruce Linton, Canopy Growth (NYSE: CGC): "I'm very happy with what we've seen over the last year in terms of the names, quality, and total volume of institutional [investment] purchases we've attracted."
It's not surprising to see those executives feel so strongly about the companies they lead. Yet when you look at figures compiled by S&P Global Market Intelligence about their holdings of stock, it seems to say something completely different about their level commitment.
Reported Stake in Company
Value of Shares
Terry Booth, Aurora Cannabis
Michael Gorenstein, Cronos Group
Sebastian St.-Louis, Hexo
Brendan Kennedy, Tilray
Bruce Linton, Canopy Growth
Data source: S&P Global Market Intelligence. Note: Canadian dollar values translated at rate of CA$1 = US$0.75.
That picture suggests only minimal CEO exposure to the companies they run. That's not entirely unusual, as when companies grow to become the leaders of their industries and pick up a lot of institutional investors, it can be much more difficult to hold onto equity over the long run.
Looking beneath the surface
Yet as it turns out, the numbers above are in some cases highly misleading. That's because in some cases, those figures include only direct holdings of stock by the CEOs themselves. It takes some further digging, but several CEOs have larger stakes through indirect holdings:
- Bruce Linton has a beneficial interest in roughly 2.5 million shares of Canopy Growth through an entity called HBAM Holdings.
- Brendan Kennedy is CEO and co-founder of Privateer Holdings, which holds 75 million shares of Tilray, representing a roughly 78% stake in the cannabis company.
- Michael Gorenstein has an indirect interest in roughly 450,000 Cronos Group shares owned by Gotham Green, L.P.
What insider ownership means
Even with those caveats, it's still disappointing to see many young marijuana companies having leaders who don't have the same entrepreneurial stake that you've seen in many other fast-growing industries. In areas like tech, small-cap companies often have founders who've retained huge portions of their equity. That ensures continued excitement in the company's prospects -- and shared success when things go well.
Shareholders shouldn't lose confidence in leadership based solely on how much stock a company's CEO owns. But as more marijuana companies reach prominence, it'll be interesting to see how many founder/CEOs can hold onto the shares that they started out owning -- because that could be the best sign of a cannabis company that truly stands out from the crowd.
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