VIDEO: Echelon Wealth Analyst on Potential Cannabis Brewing Partnerships

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Midas Letter
VIDEO: Echelon Wealth Analyst on Potential Cannabis Brewing Partnerships

Echelon Wealth Partners Equity Analyst Russell Stanley joins James West to chat about the Canopy Growth-Constellation deal and the mainstreaming of the cannabis industry globally. Stanley acknowledges that the Constellation deal, in combination with the partnership between Molson and Hydropothecary, “confirms the big beverage players have an interest in cannabis, and those without a dance partner are going to have to find one soon.” Stanley suggests Aurora Cannabis Inc (TSE:ACB), CannTrust Holdings Inc (TSE:TRST), Hydropothecary Corp (TSE:HEXO), and OrganiGram Holdings Inc (CVE:OGI) are potential candidates for the next big deal between cannabis and brewing industries because these companies have large-scale, fully-financed production platforms and sales agreements with multiple provinces. Stanley regards US valuation multiples as too low compared to Canadian multiples, and believes cannabis investors are going to take advantage of lower American valuations.


James West:   Hey, welcome back to Midas Letter Live. My guest in this segment is Russell Stanley; he’s the equity analyst with Echelon Wealth Partners. Russell, welcome to the show.

Russell Stanley:   Thank you for having me.

James West:   Russell, the main flavour of the day in our universe is cannabis, cannabis, cannabis, cannabis. What have you got to say for yourself about cannabis?

Russell Stanley:   I could say a lot.

James West:   I bet!

Russell Stanley:   Every day is a new adventure. As I’ve said to a number of people, there’s no groundhog days in cannabis; every day is something new.

James West:   Yeah, no kidding. Let’s start with the elephant that still persists in the room, is the $5 billion – I call it a takeover, people like to correct me – but with four seats out of seven on the Board, it’s a takeover in my book, especially with the 50 percent that they’re going to end up owning, Constellation I mean, in reference to Canopy Growth, if they were to exercise their full warrant. The whole sector has been taken higher by this event, so is it safe to categorize this as, essentially, a mainstreaming of the cannabis industry globally?

Russell Stanley:   I think it is. I think, you know, what we saw is the start, and what started as a product development joint venture, if you will, back last October, has become with Constellation’s investment a recognition that this is a global business. And the opportunity goes beyond just one product, and goes beyond just Canada or the United States; this has become a global platform for Constellation to expand into a new consumer market altogether. And I’d agree that it is a de facto acquisition or takeover of Canopy, given the Board control, and what their fully diluted share position looks like.

James West:   Okay, so what are the implications for, let’s say, cannabis players Two, Three and Four, in the context of this takeover?

Russell Stanley:   I think that other companies, you know, similar parallels to Constellation as well as companies in other markets like pharma and potentially tobacco and other consumers products companies – all of them are now going to have to explain to their boards why they haven’t gotten involved in cannabis yet. So it’s a significant transaction, it validates the cannabis opportunity. I think in combination with the recent agreement between Molson and Hydropothecary, it confirms that the big beverage players have an interest in cannabis, and those without a dance partner are going to have to find one soon.

James West:   I mean, Number Two in terms of market cap is Aurora, and so I think this transaction has caused the market to look askance at Aurora and say, well, where is your $5 billion dance partner? Do you think that Aurora is, you know, sort of the logical next candidate for such a major sort of tie-up?

Russell Stanley:   I think on size there are several candidates; Aurora could be one. Certainly with their last two acquisitions, with CanniMed and MedReleaf having been acquired, they’ve certainly augmented their production asset base and really established themselves as a national player, and so they would be a very strong candidate. We also like CannTrust, Hydropothecary and Organigram as potential candidates as well, all because they have large-scale, fully financed production platforms and sales agreements now into multiple provinces.

James West:   Wow, you just named all of my favourite companies – well, a good handful of them, anyways. So let’s talk a bit about some of the American opportunities. I’m curious as to what your perspective is, because I find there’s a lot of, you know, differentiating among analysts, among institutional players, about, you know, what are the risks, what are the opportunities. So you know, we’ve seen that the opportunity to fund US cannabis operations in states where it’s legal has remained, for the most part, a Canadian opportunity. Now, we’ve also seen the US, for example, ban for life an investor of, you know, good reputation. And so that gives a lot of people pause to say, well, wait a sec: do I really want to be investing in a US company if I have interests and/or cause to travel to the United States frequently?

So do you think that the opportunity is still Canadian, or do you think that the US is moving quickly enough towards de-prohibition Federally that its becoming more of a US opportunity?

Russell Stanley:   I’d go with the latter. I think we’re seeing a de-risking of the environment there in the US with the introduction of the States Act in particular, and other initiatives underfoot, like the UN going with a review of cannabis and its components, whether or not they’re properly categorized as controlled substances. These are all things I think point to the US Federal-State disconnect being cleaned up sooner than perhaps people expect. I think Bruce Linton of Canopy alluded to that potentially coming sooner than people anticipate, during the most recent conference call. So I definitely think the US Federal environment, the risk there has come down significantly since the Sessions Memo back in January, which I think you’d say has potentially backfired altogether by lighting a fire under the legalization movement and removing what cover there was, and forcing people to move faster rather than simply rest on their laurels and believing they were safe when they weren’t.

So we’ve seen the risk level come down; we’ve certainly seen a number of US operating companies come to market, and we think there will be more. And obviously the US is potentially a much larger market than Canada’s already, in terms of absolute sales, but with more states legalizing medical and potentially recreational as well, the opportunity is huge.

James West:   Mm-hmm. So are there any names that you could talk about that Echelon Wealth Partners is following in the US?

Russell Stanley:   So we recently picked up coverage of Green Thumb Industries – ticker is GTII. Their current core market is in Illinois; that’s where their home is, but they now have interests in eight states. They’re working to close acquisitions that would put them in New York and Florida, which are huge markets. They focus on states where they think they see high entry barriers, so where competition should be limited, usually because those states issue a finite number of licenses to cannabis companies. We have a $20 target; I think the stock is trading around 10, so I think it’s a double from here.

James West:   Wow, that’s pretty substantial commitment to the whole US market, that’s great! The reason that most of the US-listed companies are forced to list on the CSE as the only exchange really available to them at this point, is because of the Federal de-prohibition, etcetera. But we’ve seen, for example, Tilray has gone and launched an IPO successfully on NASDAQ, which, you know, not the NASDAQ junior market, the NASDAQ senior board. So that sort of also kind of puts me, at least, in the sort of frame of mind where I’m like, well, how can you list a cannabis company on the NASDAQ that’s, you know, legal outside of the United States, while you’ve yet to reconcile the Federal and State-level laws? Especially in view of the fact that the Federal laws themselves are in conflict, the DEA versus the Controlled Substances Act, since the FDA licensed that epilepsy drug from GW Pharma. So I mean, for me that’s the tough part about actually moving decisively into the United States; there’s still too many contradictory sort of touchpoints, flashpoints, in the whole matrix that, you know, I don’t want to get stopped at the border and say ‘you can’t come in’.

So, but, for the most part, investors are being left alone. It’s not the investors that the border patrol is necessarily after, is that right?

Russell Stanley:   I don’t, yeah, I don’t think the average public market investor is really there, and if you consider it this way, there are a couple of Canadian cannabis companies that are now part of the TSX Composite. If that is, you know, if you own an ETF, then you indirectly own these companies. I mean, we’re all essentially de facto investors in cannabis at this point, so I don’t think that concerns around the border – everyone has to manage their own border affairs appropriately, but I definitely think the opportunity is huge in the US. We obviously see some pretty high valuation multiples in Canada, and for the most part, some of them are warranted because of the growth opportunity here. But the multiples that are available to investors in the US, I think, are too low compared to Canadian multiples – too low to be ignored. And people are starting to take a look at US operating names in recognition of that.

James West:   Do you agree with the concept that, upon Federal de-prohibition in the United States, there’s going to be a stampede out of Canadian equities in the cannabis space into US ones?

Russell Stanley:   I think there’s a possibility of a rotation that takes place, and maybe it doesn’t have to wait until, you know, it’s formally recognized at the US Federal level; if people expect it to happen, then equity markets are probably going to discount it in advance. But right now, Canadian names get twice the multiple the US operating names do, and perhaps a discount today is warranted because of its Federal status, but a 50 percent discount seems excessive. So I think that people who’ve got their eye on valuation, I think cannabis investors in general are starting to pay a bit more attention to valuation; where they see that, people are going to start to take advantage.

James West:   You bet. Russell, let’s leave it there. That was a great first conversation for us; I hope to have many more. Thanks for joining me today.

Russell Stanley:   Thank you for having me.

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