Large retail bases pose unique IR challenges
Due to the restrictions placed on institutional investors on entering cannabis stocks, the vast majority of public companies in the cannabis space have an investor base made up primarily of retail shareholders.
In a 2019 survey of 250 retail investors by KCSA Strategic Communications, half of respondents say they pulled money from other industries to invest in cannabis.
More than a third (40 percent) of investors are significantly overweighting their cannabis investments, which make up more than a quarter of their overall portfolio, according to the survey. And while there continue to be issues for cannabis companies around compliance with regional and national laws, 84 percent of respondents are not concerned about the federal illegality of cannabis.
‘Retail investors tend to be more emotional and more committed to the stocks they buy,’ says Fromer. ‘Smarter money knows how to trade in and out of opportunities and [retail investors] have the wherewithal to do that.’ But having such a large retail shareholder base can pose some unique investor relations challenges, specifically relating to cost, volatility and education.
‘This is investor relations like no other because of the sheer size of the investor group,’ says Burns. ‘We have 760,000 shareholders. That increases volatility and means that in every disclosure we’re educating and managing our investors.’
Burns estimates that Canopy Growth’s shares are 55 percent held by retail investors. This is unusually low for a public cannabis company and is due to Canopy Growth’s deal with Constellation Brands (which holds around 35 percent of the shares) and the company’s position as a first mover, which has led to some institutional ownership.
Communicating with such a large investor base can be costly. Burns explains that for the company’s annual shareholder meeting in 2017, there were 87,000 separate shareholders – 7,000 in the US and 80,000 in Canada. For the company’s special meeting in 2019 to approve the acquisition of Acreage Holdings, Burns says he had to mail out printed meeting materials to 600,000 shareholders in the US and 160,000 in Canada. ‘It goes without saying that that is a lot of circulars to mail out,’ he observes.
‘We mailed out well over 300,000; our printing costs alone totaled C$1.5 mn.’
The investor base at High Tide is even more extreme, with 99 percent of shares held by retail investors, according to Kuzyk. Around 45 percent of the company’s shares are owned by the CEO and his family, which Kuzyk says protects the company from the fear of an activist entering the stock.
But having such a large retail base poses other challenges when it comes to volatility. During this year, High Tide’s stock price has fluctuated between 22 and 41 cents per share.
‘Any little bit of downward pressure or upward support in the market is really going to move our share price,’ Kuzyk says. ‘We trade about half a million shares a day and it doesn’t take much to move our price up or down. We’ve been all over the place, and that kind of volatility can cause a lot of stress to retail investors who aren’t used to it.’
Goldberger explains that having a volatile and unsophisticated shareholder base will increasingly be a problem for companies as they look to mature and deploy capital in sustainable ways that might be misunderstood. He specifically cites the issues that some life sciences cannabis companies are facing, relating to their research and development expenses.
‘We’re having discussions with companies that are on the true life sciences side,’ he says. ‘The cannabis investor doesn’t ultimately understand the life sciences sector. These firms might be doing research on a specific medical condition and being asked about how many strains of cannabis they’re making. They’re happy to be public, but they’re having to deal with very misguided individuals.’