Few events rival the excitement of marijuana stocks either going the initial public offering (IPO) route or going public via a reverse takeover. With the marijuana industry forecast to produce as much as $75 billion in annual sales by the end of the next decade, Wall Street and investors understand that this could be their once-in-a-generation opportunity to take advantage of the growth associated with the green rush. And potentially, the more publicly traded pot stocks there are to choose from, the better chance investors have to make money…
The downside of IPOs: Lockup expirations
Of course, there’s a downside to becoming a publicly traded company, namely the dreaded lockup expiration. Securities regulations disallow insiders (e.g., company directors or management) from selling any of their stock for a period of (usually) 180 days following the first day of trading. This is to prevent companies from going public, having management cash out on a large first- or second-day pop, and leaving unsuspecting investors holding the bag, so to speak.
Lockup expirations can be relative nonevents, or, in some instances, they can completely derail a high-flying stock. Since they represent the first opportunity for insiders to lock in gains, it’s not uncommon for the expectation of insider selling to push the share price of stocks facing a lockup expiration lower.
During the first half of 2019, close to a half dozen big-name marijuana stocks were expected to face the lockup of a majority of their shares. However, in three of these instances the primary shareholders voluntarily agreed to extend their lockup expiration for a period of six months. In plainer English, the insiders of these marijuana stocks promised not to sell a single share until almost a year had passed since they’d gone public, as opposed to the 180-day mark, when lockup expirations generally occur.
Why voluntarily extend a lockup agreement? The simple answer is that it may help instill confidence in investors that management isn’t out for a quick buck, and that it has faith in a company’s long-term strategy. All three of the following pot stocks are facing what could still be a very large share lockup in the second half of 2019, and that means investors should be paying attention.
Arguably the biggest train wreck of a lockup expiration among marijuana stocks was Tilray‘s (NASDAQ:TLRY) in mid-January. On the day of its lockup expiration, shares of the company fell 17%.
Not long before, Tilray’s largest shareholder, private-equity firm Privateer Holdings, which holds nearly 80% of the company’s outstanding shares (75 million), had announced that it would voluntarily extend its lockup agreement until the second half of 2019. In other words, Privateer agreed not to sell a single share of Tilray stock until at least July. This move was meant to convey the idea that Privateer believed in Tilray’s long-term strategy.
However, Tilray has given up the vast majority of its gains since its IPO. After listing at $17 per share, Tilray shot as high as $300 in mid-September before crashing back to Earth. Following its most recent quarterly report, Tilray’s CEO Brendan Kennedy announced that his company would focus on expansion in the United States and Europe moving forward, while deemphasizing Canada. This strategy shift is occurring right as the cannabis industry ramps up in North America, and it’s a decision that hasn’t sat well with Wall Street or investors. It’s also pushed back any chance of recurring profitability until 2021, at the earliest.
Therefore, we have a company with a relatively low float that could see its tradable shares balloon quickly if and when Privateer does decide to lock in gains. That could happen in…
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