Why Village Farm International Shares Are Sinking Today

What happened

Shares of Canadian cannabis producer and greenhouse produce grower Village Farms International (NASDAQ: VFF) were sinking 9.7% lower as of 11:33 a.m. EDT on Thursday after dropping as much as 13.7% earlier in the day. The primary reason for the sharp decline was the company's announcement of a bought-deal public offering of 2.66 million shares. Canadian marijuana stocks, in general, also pulled back after HEXO provided a disappointing sneak peek of its Q4 revenue and highlighted the uncertainty in the broader Canadian cannabis market. 

So what

Village Farm's latest public offering dilutes the value of existing shares. This offering represents a little over 5% of Village Farms' total outstanding shares. However, an even bigger reason for the stock's drop today was the price tag of that offering, which reflected a 10.8% discount from the stock's closing price on Wednesday.

Marijuana plant growing in a greenhouse

Image source: Getty Images.

There was some good news for Village Farms, though. The bought-deal public offering raised gross proceeds of CA$25 million (around US$18.8 million). Village Farms stated that it plans to use the additional cash for "working capital and general corporate purposes."

It made sense that the company would take the opportunity to generate more capital right now. Village Farms has been the best-performing stock in the biggest marijuana exchange-traded fund (ETF) so far in 2019. Companies with high-flying stocks that need more cash frequently opt to conduct a stock offering to take advantage of the higher share price.

Now what

The sting from Village Farms' public offering should only be temporary. Probably the bigger issue for the company looking ahead was raised in HEXO's latest update. HEXO withdrew its fiscal 2020 financial outlook because of questions about the cannabis derivatives market opportunity in Canada and early signs of pricing pressure.

Investing in marijuana stocks can be particularly risky because of the uncertainties about the market potential and the general lack of financial strength for many cannabis companies. Don't be surprised if Village Farms gives investors a choppier ride going forward.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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