If pot is so hot, why aren’t cannabis directors buying their own companies?
Health & Biotech
Cannabis as an investment forum is extremely popular amongst its adherents, but it’s not nearly as popular amongst its own directors.
In spite of the hype around the sector, only a handful of directors in the 14 companies Stockhead monitors as ‘pure’ pot stocks — those which don’t have non-cannabis side hustles — actually bought (or sold) their own stock.
Just 15 directors in all of 2018 spent their own money buying their pot stock, be that via on- or off-market trades, or share purchase plans, and one sold.
Those that bought were from AusCann (ASX:AC8), Botanix Pharmaceuticals (ASX:BOT) Cann Group (ASX:CAN), CannPal (ASXCP1), and THC Global (ASX:THC).
All Cann directors bought stock in the company.
Pnina Feldman and her son Sholom, directors of the company formerly known as Queensland Bauxite, now Cann Global (ASX:CGB), said in the company’s recompliance prospectus they were taking up 12.5m shares worth $437,500 each as part of a capital raising to relist the company.
The relisting has not completed however and new director interest notices are yet to be issued.
At Botanix, Rob Towner told Stockhead he needed some cash so he sold stock to fellow directors and a manager at the company.
And the eSense performance rights were on hold after a shareholder uprising, and ASX questioning, at the start of 2018 over whether a series of deals qualified as appropriate hurdles for directors to receive said rights. They were released from escrow this month after the company signed a material sales contract, albeit one that hasn’t delivered any significant sales yet.
> Scroll down for an explainer about shares, options, rights and what they mean.
The 14 pure pot stocks Stockhead monitors are collectively down 17.2 per cent in 2018, although some have seen an uptick on the back of new year optimism.
Dean Fergie, founder and fund manager of Cyan Investment Management, says directors not selling stock, once it’s out of escrow, is “at least not a negative”, although he says there are plenty of excuses available to explain away directors not buying.
He also points out that pot stocks aren’t a place for investors who lack a strong stomach.
Mr Fergie says cannabis is still a highly speculative investment: it’s a new industry, no one knows who will fail and who will succeed, volatility is high, no ASX companies are profitable yet, and all are early stage.
“There is absolutely no doubt that the whole sector is fill of speculative hot money… looking to make a fast buck,” he told Stockhead.
Directors’ shares in companies like Althea Group (ASX:AGH) and Elixinol Global (ASX:EXL), which both listed last year, are escrowed — or restricted from trading — for 24 months, meaning they can’t be sold.
Elixinol’s stock has risen 248 per cent from the issue price just over a year ago, making it unnecessary (and expensive) for directors to support the stock.
And those directors are receiving incentives to keep the momentum moving, negating the need to buy.
“Elixinol Global’s directors benefit from a long-term incentivisation plan for shares, which has been designed to drive motivation and retention,” chief Paul Benhaim told Stockhead.
“We are delivering continued revenue growth and a strong, steady increase in our share price. Presuming we continue to perform and execute upon our strategy, our director incentive scheme should ensure they are well rewarded through their shares.”
THC boss Ken Charteris reckons his directors are suffering from corporate over-exertion.
“We’re restricted as directors of the companies because there’s been so much activity… we’re almost permanently in a hold, to be quite honest, because of our activities,” he told Stockhead.
‘Blackout’ periods are times when directors can’t trade stock because they know information the market doesn’t.
“All of them are continuously asking the question ‘when can we buy’, and continually they’re told because they’re privy to [confidential] information, they can’t.”
Zelda’s new head Richard Hopkins says they’re an unusual case because the four other directors are founders who promised to put their stock back into escrow in November last year.
“They were trying to send a signal to the market that they were fully committed to the company,” he said.
Harry Karelis, Stewart Washer, Mara Gordon and Jason Peterson collectively own 30 per cent of Zelda.
Directors can receive and offload shares in a variety of ways.
Often companies of all sizes will pay directors incentives in stock, options, or performance rights.
An option is a right to buy a share at a certain price — you’re “in the money” if your option is priced at 5c but the stock is trading at 10c, as it means you’ve almost doubled your money immediately.
A performance right gives directors shares if they meet certain performance hurdles.
The latter two don’t require payment up front, but you do need to pay to use, or “exercise” options.
Directors can trade their shares off-market to an agreed party for an agreed price without having to buy or sell them on an exchange at the prevailing market rate.
Or they can trade on market. This is widely seen as the biggest insider vote of confidence that a stock will go up, or a sign that maybe it’s hit a peak.
(It can also be a sign that directors, some of whom are solely paid in stock, need some real money to pay the rent.)