In 2014, there were less than 30 publicly traded cannabis companies listed on the TSX, TSX Venture and the CSE combined. Flash forward to September 2018, a month and a half prior to federal legalization, and there are over 125 publicly traded cannabis companies within Canada – of course not taking into account the newly minted LPs in the midst of going public. As cannabis companies race to market their brands prior to the strict regulations that come into effect on October 17, they must not overlook the importance of one group – investors. Craig MacPhail, VP of Investor Relations at NATIONAL Equicom, discusses the importance of a targeted investor relations program in helping both newly listed and exchange veterans keep their dynamic stakeholder base engaged in a burgeoning sector.
The cannabis sector is growing every day and competition between LPs is increasing. How does a company demonstrate to investors that they are going to win in the long-term?
After working with several cannabis companies and hearing from countless investors in the sector – both novice and professional – three key details seem to stick for those looking for a sound cannabis investment. And they are pretty much in line with what investors are looking for in all companies.
First, the quality of the management team and board. Investors want to feel confident that those leading the company have both the experience and professional background to build the business for the long-term. Being a trusted leader is valued in any sector but possibly more so in an emerging sector like cannabis where investors don’t have the benefit of past performance to make their judgements.
Next, cannabis companies need to demonstrate that they have a solid business plan and go-forward strategy. A company’s vision should be clear and differentiated from its peers. It should also communicate its short and long-term milestones that will enable investors to track their progress and check these off as they are attained.
Lastly, but most importantly, an attractive financial profile is key. Investors want to know that the company is not only healthily funded, but is allocating capital responsibly. The cannabis sector is fast-growing and changing rapidly. We’ve seen that as regulations have been introduced, and revised, new territories have opened up and new business models have emerged. It’s guaranteed that all companies will face both opportunities and challenges — those with a strong capital platform will prevail.
While institutions have been making an entrance into the cannabis sector, retail shareholders still make up the majority of the investors. How does a company manage a diverse shareholder base?
I have worked with a few new sectors over the years and, uniquely to cannabis, we’re talking to many people that have never bought a share before until they invested in a cannabis company. Partially, this is because many activists and patients are investing in companies in which they are a consumer and/or supporter. In other words, for some shareholders, investing in cannabis is as much a social advocacy move as a financial decision. It’s important for companies to appeal to these individuals in a broader manner – whether that be through beefing up their CSR initiatives or leading as an educator in the sector. As well, the prospect of a legal cannabis company has caught the imagination of a sizeable segment of the public. With so many first-time investors within the space, it creates an even greater obligation around responsible communications. As we recommend for all public companies, cannabis companies should be clear and consistent in their disclosure, but they also need to be careful with the use of forward-looking information. Because of the high number of novice shareholders, share prices are volatile as investors both react and overreact to news. We saw this when the share prices of several Canadian cannabis companies spiked after ballots were passed in several U.S. states legalizing marijuana, despite that fact that the companies could not sell cannabis there.
On the other hand, cannabis companies must also address the needs of professional investors – some of which ambivalently enter the sector to diversify their holdings and to capture the opportunity that’s in the market. As such, all investor materials should contain clear and consistent metrics with a commentary that demonstrates the company’s ability to maintain a solid, ongoing business.
The market is still adapting to the emergence of the cannabis sector. As the industry grows, how do you think financial communications trends will develop?
Market expectations will undoubtedly change once cannabis is legal and companies will need to adapt their communications strategies accordingly. Right now, we’re seeing many LPs communicating with agricultural-type metrics, such as growing capacity. Once we’re dealing with a fully-legal market in Canada, investors will be looking at more concrete metrics, such as kilograms sold, and will be evaluating companies based on their product differentiation, go-to-market strategies and their success at capturing market share.