Re-scheduling Drives Bullish MSO Sentiment, but Not Capital (Yet); a Contrarian Indicator in Canada?

Our first ATB Cannabis Investor Sentiment Survey was conducted to identify changing investor sentiment and expectations, catalysts, and factors that could attract more capital into the space. Our survey returned responses collected from 23 institutional investors between October 24 and October 27, 2023.

Highlights include:

Bullish Sentiment, Cautious Capital 

Investors are more bullish compared to six months ago and expect MSOs to outperform the S&P 500 over the next 12 months. The improvement in sentiment has been driven by re-scheduling, which investors believe is likely to happen (75% probability) over the next 18 months. However, this bullishness has not translated into material net inflows; most reported no change or decreased exposure to MSOs over the past six months, which suggests that investors have been burned enough by regulatory false starts and are waiting for an actual re-scheduling recommendation from the DEA.

SAFE Is a Coin Flip; TSX Up-listings Less Important

Investors are most confident that re-scheduling will happen over the next 18 months (75% probability), followed by OH legalization (60%); this assessment matches our own views. Conversely, investors see the probability of SAFE Banking and FL or PA legalization happening as similar to a coin flip, highlighting the uncertainty over these events. Although re-scheduling is the main factor that would increase investors’ willingness to allocate capital to MSOs, TSX up-listings are seen as the least important factor, indicating this is not expected to be a driver of meaningful near-term outperformance.

Overwhelming Bearishness in Canada a Contrarian Indicator?

Most investors remain uninterested in or bearish on Canadian LPs and retailers, and have either reduced or kept their net exposure unchanged over the past six months. While in the US sentiment is driven by regulations, in Canada fundamentals are the biggest driver: poor operating results and shareholder dilution were cited as reasons for investors’ negative view. We are not surprised by this negative sentiment given the recent underperformance, but this could be a contrarian indicator.

Canadian cannabis bulls are close to extinction; meanwhile, the Canadian market is growing double-digits, and there are profitable small-cap companies trading at deeply low multiples. Our macro thesis for the past year has been that retailers offer the best opportunity as brick-and-mortar margins are expanding in a consolidating market, but even among LPs we think there are opportunities at these levels.