Typically, in insider analysis, it pays to go with insiders who are challenging a big market move by buying a selloff. That’s because insiders always know more about their companies than investors. Their purchases suggest the selloff is exaggerated and buyable.
A good example right now is the cannabis sector lender Advanced Flower Capital (AFCG).
An AFC director, and its president and chief investment officer in the past few days stepped up to buy a sizeable $1.6 million worth of stock in the $4.04 to $4.17 range. They’re challenging the market by buying the stock on a drop following several weak earnings reports.
They’re telling us AFCG stock looks too cheap. Their message is confirmed by the numbers. AFC trades at almost half its reported book value per share of $8.18.
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The cannabis lender on August 14 reported a second-quarter loss of $13.2 million or $0.60 per share. Results were weighed down by several dud loans.
The Developments That Could Validate This Cannabis Sector Insider Buy
* AFC has had to write off several bad loans and increase reserves against losses to $44 million, according to accounting rules. But it continues to try to work out the loans and recover funds by selling collateral. Progress would boost reported results.
*Rescheduling cannabis could help bail out some of AFC’s dud loans. That’s because it would increase cannabis company cash flow by obviating an IRS rule that prohibits the deduction of operating expenses against the sale of Schedule I substances. Rescheduling would do this by moving cannabis to Schedule III under the Controlled Substances Act.
“We believe rescheduling cannabis would increase the supply of capital for cannabis companies and lead to potentially better recoveries for our troubled loans,” said CEO Daniel Neville during the company’s mid-August earnings call.
* AFC recently got a vote of confidence from a major bank. In the second quarter, the bank expanded AFC’s senior secured revolving credit facility to $50 million from $30 million. AFC doesn’t name the bank, but it says the bank has over $75 billion of assets.
* AFC wants to expand beyond real estate-backed lending. Currently, AFC is restricted to real estate lending as a real estate investment trust (REIT). Advanced Flower says it plans to ditch its REIT status and convert to a business development company (BDC) if shareholders go along with the change.
Converting to a BDC will allow Advanced Flower to offer loans to cannabis companies without real estate or about two-thirds of cannabis companies, it says.
“Given the capital-intensive nature of the cannabis industry, combined with the high cost of capital, many operators do not own real estate, which significantly limits the universe of cannabis operators AFC can lend to as a mortgage REIT,” said Neville. “Converting to a BDC would significantly expand our investable universe, allowing us to lend to ancillary cannabis businesses with high growth potential, as well as non-real estate covered, vertically integrated operators,” he said.
* You get paid nicely to wait for positive developments. AFC offers an attractive quarterly dividend of $0.15 per share. That works out to a 13.3% yield on a name that also offers the potential for capital appreciation – if the insider buying on weakness is any guide. I think it will be.
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