By DAVID MILSTEAD
Friday, July 20, 2018
The boom in marijuana stocks has allowed insiders at the industry's biggest companies to sell $250-million worth of stock in the past year - but if share prices hold, there's still hundreds of millions more for them to make.
The figure is based on a Globe and Mail analysis of insider-trading records for executives, board members, and major shareholders at the seven biggest Canadian cannabis companies from July 1, 2017, to June 30 of this year.
As the federal government moves on its plan to legalize recreational marijuana by Oct. 17, investors have stampeded into the sector, driving up stock prices and giving several companies multibillion-dollar valuations. The wave of investor capital has prompted dozens of young companies - many of which have little to no revenue - to tap the public markets and go public.
The sector's stratospheric valuations have encouraged some executives and early investors to turn their paper profits into cash. At MedReleaf Corp., which is about to be acquired by Aurora Cannabis Inc., insiders have sold $91.7-million in stock, led by four early investors in the company. (Investors that own more than 10 per cent of a public company are required to file insider reports when they buy and sell stock.) Aurora insiders have sold $64.4-million.
At the other extreme, insiders of Cronos Group Inc. have been hanging on - just one insider sold shares in that 12-month period, for a total of just $450, according to records in SEDI, the System for Electronic Disclosure by Insiders, Canada's on-line, service for the filing and viewing of insider reports.
As impressive as the sales totals can be, however, they pale in comparison to the value of the shares many cannabis executives still hold. The rally in marijuana shares has created vast riches for some of those who got into the game early.
In many cases, the insiders who are cashing in their shares are trimming their positions by no more than 5 per cent or 10 per cent. They are aware that unloading large amounts of stock at once could be seen as a negative signal to the market.
"Relative to our holdings - because we were major investors - our group sold down less than 10 per cent of our total holdings," said Eric Paul, the CEO of CannTrust Holdings Inc. who sold $4.5-million worth of his company's shares in the 12-month period, in part because investors were asking for more shares to be in the public "float" to satisfy demand.
"I'm the largest holder. I had 121/2 million shares, I sold half a million, and I'm not selling any more because I can see where we're going ... No more for me, I'm done."
Bruce Linton, CEO of Canopy Growth Corp., the largest cannabis producer by market capitalization, said: "I'm about a third of the total insider selling [$6.6million, by The Globe's calculations], and it represented maybe 6 per cent of my holdings.
There's a number of people who have been with the company for five-plus years and they're taking a small proportion of their total ownership and selling." Mr. Linton still holds about $97-million of Canopy shares and stock options.
Aphria Inc. sounded a similar note in a statement: "Share sales by Aphria insiders over the past year represent only a small fraction of their total holdings in the company. Aphria directors and officers continue to hold a significant percentage of the company's issued and outstanding shares."
The tracking of company stock sales by insiders is a part of the mosaic of information investors can use when gauging whether a stock is a worthy investment. Analysis of insider activity goes beyond raw sales numbers and involves examining total holdings, the use of stock options, whether sales are occurring when stock prices are rising or falling, and a number of other indicators.
"If you're looking to invest in a marijuana company, or hold a marijuana company, I'd definitely be looking at what the CEO has been doing in the past six to 12 months," said Ted Dixon, who runs a research firm that specializes in looking at stock sales by company insiders.
"If the CEO is sticking in there and hanging on to their stock, that shows you they're in it for the long haul. If they're opportunistic and taking some profits, OK, that's fine, however, look at their overall holdings - are they going up or going down? You have to gear your outlook accordingly. If you had a CEO adding to their position right now, that would be extremely bullish."
In some cases, there's a mix of buying and selling. A number of insiders at Aurora Cannabis, such as chief corporate officer Cam Battley, exercised employee stock options in the fall of 2017, some with strike prices below $1, and sold the resulting shares for more than $8 each. This is how Mr. Battley grossed $846,000 last December.
(A stock option allows the older to buy shares at a certain price, the "strike price," at any time until the option expires. As the market price of a stock rises above the strike price, the options become more valuable.)
In March, however, Mr. Battley bought 27,685 shares on the open market at just more than $9 each, spending $250,000 to add to his position. "We're buyers, as well," he said.
"All companies in this sector and in any fast-growing sector get this question: Why are insiders selling?" Mr. Battley said.
"It's a small percentage of our overall holdings. Our management owns in excess of $400million of Aurora stock. That's a huge chunk. ... So it's not unusual for a fast-growing company - and we've been growing faster than just about anybody - with a rising stock to have people take a little bit off the table now and again."
At MedReleaf, which will be acquired by Aurora Cannabis in the coming days, four early shareholders, each of whom own at least 10 per cent of the company, sold a total of 4.65 million shares in the 12-month period for gross proceeds of just over $90-million, nearly all of MedReleaf's insider total. They still retain nearly 44 million shares, worth $1.2billion at Wednesday's closing price of $27.57.
Dennis Fong, a spokesman for the company, said: "MedReleaf is at the top of [The Globe's] list because of the tremendously high return on equity an early group of investors had.
"MedReleaf's growth and success as a top licensed producer has created a lot of value for these investors, and they had no role in the management of the company or knowledge of any material non-public information."
THE GLOBE AND MAIL, SOURCE: SEDI