T.Today I’m going to break two unwritten rules about what I write here at Nasdaq.com. I usually don’t write much about over-the-counter (OTC) stocks that aren’t listed on a stock exchange, and I don’t talk much about pot stocks either. The first of these is that, as you would expect, OTC stocks often have limited liquidity, making it difficult to stick to good position management. The second reason is that cannabis is still a very young industry where picking potential winners from a fairly crowded field is at least extremely difficult, if not impossible. Usually there just isn’t enough information to make a decision, and the search often comes down to who can survive rather than thrive.
However, none of these objections apply to an OTC cannabis stock, Ayr Wellness Inc. (AYRWF).
The volume bars at the bottom of the graph above show that the volume of around 250,000 stocks is normal, with over 500,000 over several days. This is by no means massive, but it is enough to fill in the large price gaps that can be a problem in all circumstances but the most extreme.
However, this only removes one reason not to buy AYRWF. The positives, the reasons for buying the stock, are much more interesting.
Ayr Wellness recently made several acquisitions and prepared for recreational cannabis legalization in several states, including the acquisition of CannTech and Liberty Health Sciences. This carries some integration risk that comes with the financial risk always associated with top stocks whose product is still illegal at the federal level, but it will allow them to expand quickly to take advantage of a massive opportunity. The legal cannabis business in America is expected to more than double in the next five years, and that could still be underestimated as more states push, legalize, regulate, and tax revenue after the pandemic.
However, many of the better known companies that can benefit from it face a problem from an investment perspective. You have high cash burn rates and limited capital. This limits their ability to expand at the required rate. It’s not that they can’t survive, it’s just that they might miss some of the opportunity. In many cases, they will counteract this with capital increases and possibly dilute the value of an investment.
AYRWF is an exception here in many ways. First, they have already made several acquisitions, and second, despite their currently limited geographic footprint, they have positive cash flow. This does not guarantee that a company with as many growth opportunities as cannabis will no longer issue stocks, but it does reduce the short-term likelihood of AYRWF becoming a profitable, albeit risky, investment.
There is a notable short-term risk to be considered here. Ayr Wellness is expected to announce its fourth quarter results in a few weeks, more specifically March 23rd. This is for a quarter of some M&A activity, but none of the new assets would have gone online by the end of last year. That could lead to some disappointment, regardless of the numbers. That might be a case of waiting for it to be released before jumping in, but really, if you’re a conservative investor who thinks you probably shouldn’t even think about something that is inherently risky like an OTC pot share.
My reluctance to write about OTC and cannabis stocks came about for good reason. So you might think I was avoiding a stock that is both like the plague. The risks here are somewhat offset, however, and the tremendous potential of a company like Ayr Wellness, which has so far proven its ability to execute a growth plan without flirting with disaster, makes it a risk more adventurous investors might consider.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.