Trulieve TCNNF is acquiring Harvest Health HRVSF in an all-stock deal. The price of Harvest moved upwards just prior to the announcement but since has not achieved parity with the acquisition price of the exchange of stock for Trulieve TCNNF stock. This is free money if you are looking for an opportunity to lock in a quick 7.5%, or so. But, how do you do this?
Harvest Health HRVSF Stock
First, I am heavily bullish on Harvest Health HRVSF stock and they were one of my Top Picks. I believe the stock on its own could appreciate considerably. So, if you are a Harvest Health HRVSF stockholder this is an excellent opportunity to own the cannabis stock simply for no other reason than the company will do very well on its own. But, HRVSF is being acquired by Trulieve, a behemoth with tremendous potential and one of the best marijuana stocks to buy.
Trulieve TCNNF Stock
Trulieve is a Florida-based medical cannabis company that is expanding its footprint across the nation. They are doing so very strategically and acquiring excellent cannabis companies. On my Complete List of Top 100 Cannabis Companies, Trulieve is ranked #28 in QoQ revenue gains, #1 in revenue per share, #16 in gross margins, #11 in operating efficiencies, and #3 in EBITDA/Revenue. These are impressive metrics across the board and rate Trulieve as one of the best marijuana stocks to buy now.
So, if you owned Trulieve on its own, again, kudos to you for owning a cannabis stock with tremendous upside potential. The acquisition will merely expand the footprint of the giant cannabis stock and from there, Trulieve will likely push forward with significant increases.
Market Disparity
But, what I wanted to talk about today was simply the opportunity that the stock market is presenting right now: there is a mispricing of the two stocks relative to the acquisition. By now, this should have worked itself out since the deal will close relatively soon.
But, you can lock in that opportunity if your thing is to make quick profits. Mr. Market is pretty good about making sure opportunities like this are eaten away so that the opportunity does not exist. Mr. Market has not been paying attention to cannabis companies; that is an opportunity.
Mathematics
The deal is for an all-stock exchange of HRVSF stock for TCNNF stock. For every HRVSF stock a shareholder owns, they get 0.1170 shares of Trulieve stock. If you do the math on the current stock you see there is a pretty big gap between what the two stocks are trading for right now and the eventual exchange.
Currently, HRVSF stock is trading at $3.93 at market close, Thursday. Divide that by 0.1170 and you get $33.589. But, TCNNF is currently trading at $35.00; a difference of about $1.411 per share. That is a little over 4.20%.
So, how do you take advantage of this?
First, if you are looking to buy TCNNF stock, you would want to buy the HRVSF stock instead. The reason is that you are eventually getting the TCNNF but, you are getting it at a 4.20% discount.
The problem with that strategy is that both stocks have been sliding lower. You could be sitting underwater quickly if this continues.
Arbitrage
The other way to do this is to do a stock arbitrage. You can lock in the difference between the $35.00 and the $33.589 price, or profits, and sit on that until the deal concludes.
If you buy 117 shares of HRVSF you’d pay $459.81 at the current price of $3.93. Simultaneously, if you sell off 10 shares of TCNNF your position size would be $350.00. The stocks would convert when the deal concluded. So, if you were short the TCNNF position and long the HRVSF position when the deal transferred your TCNNF position would be replaced with the newly converted TCNNF shares.
Simple.
You need to maintain the ratio of 117/10 where you are buying 117 shares of HRVSF and selling 10 TCNNF stock. If you multiply by any number you need to maintain the same math. And, the spread will be locked in. So, if you multiply this by 1,000, you’d have 117,000 long HRVSF and short 10,000 TCNNF. In that case, with the spread being $1.40, you’d be making $14,000.00 on the trade.
If the stocks both simultaneously go up you lose on your short TCNNF position but gain the exact same amount on the HRVSF position. Same, if both stocks go down. Then, you wait for the conversion to take place and you are automatically cashed out.
Look out for more
I see this all of the time; trades such as these occur often with cannabis companies when they merge. The stock market is supposed to be efficient. Mostly, it is. The fact that someone running a YouTube channel can find this when someone inquires about buying TCNNF and I tell him no, buy HRVSF instead, then anyone can find this trade. But, cannabis stocks have been ignored by Mr. Market and the laws of efficiencies.
Find other mergers of other companies and you will see there is money to be made, low risk.
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