October 26, 2018

VIDEO: CB1 Capital Cannabis Could be $3 Trillion Market

Midas Letter
Midas Letter
VIDEO: CB1 Capital Cannabis Could be $3 Trillion Market

CB1 Capital is a hedge fund that invests in efficacy-driven cannabinoid wellness strategies. CIO Todd Harrison explains that CB1 Capital is interested in companies that present investment opportunities featuring a variety of minor cannabinoids, such as CBM for sleep, and not just CBD. CB1 Capital has one third of its capital invested in Canada right now and Harrison suggests biotech is about to take the leading role in efficacy-driven wellness solutions. Cannabis is currently a $300 billion cash crop and Harrison believes, with the development of new products and greater adoption, the industry could soar to be a $2-3 trillion market.



James West:   Welcome back, welcome back! My guest in this segment is Todd Harrison. He’s the Chief Investment Officer of CB1 Capital. Todd, welcome.

Todd Harrison: Thank you, thank you, James.

James West:   Todd, give us an overview: what does CB1 Capital do?

Todd Harrison: We’re a hedge fund that invests in cannabinoid wellness strategies, so really looking at cannabis through the lens of wellness. Pretty wide berth in terms of wellness, but in particular, efficacy-driven solutions. We think that this is going to be a bit of disruption for Western health care.

James West:   Wow, no kidding. You’re preaching to the converted, here. So when you say hedge fund, are your investors mostly the general public or other institutional – what sort of investor matrix are we talking about?

Todd Harrison: Typically high net worth investors, family offices, some institutions. You know, this is a space that is widely misunderstood, as you know. And as we have our conversations with folks across the investment landscape, you know, you really find all kinds here, and most people, even those who believe they get it, still think this is about growing cannabis and smoking cannabis, and we try to explain to them that this is just an ingredient. Cannabis and hemp are ingredients, and it’s pretty ubiquitous in terms of the output.

So we’re real excited about a secular bull market, and even more excited when people don’t seem to get it.

James West:   Right. And I get the sense, looking at sort of your name and everything, that you’re focused on the CBD side of things, not so much on the THC, implying more medicinal than recreational? Or is that just a misconception on my part?

Todd Harrison: Yeah, no, the CB1 receptor in the human body and in anything with a vertebrae. So the science is very much focused on reaching the CB1 and the CB2 receptors, which is different than CBD. CBD is one cannabinoid, seems to be all the rage these days, but it’s one of many. THC, of course, is sort of the, as Ethan Rousseau likes to say it, the good cannabinoid/bad cannabinoid, but certainly very therapeutic in its applications. But there’s a whole host of the minor cannabinoids, which is where we get really excited in terms of CBM for sleep and just a number of different applications that we think this gets into, in terms of wellness.

James West:   Well, Todd, I can see that you know way more about the endocannabinoid system than I do, and that’s annoying as hell, however, I will put aside my momentary childlike frustration and try to learn something, here. What level of knowledge can we have about these minor cannabinoids at this time, since it’s been such a long, dark history of suppression of research?

Todd Harrison: Yup, yup, and I see what you did, there, James, but I’ll go along with it. Certainly there are no experts in the cannabinoid space; we believe there are explorers, there are pioneers, but even those who are furthest along the pathway will tell you that we don’t know a lot more than we do know about this. But that’s sort of the exciting part, right? We do know that it’s efficacious in certain arenas; obviously, Epidiolex which GW approved that, the Class 5 from the DEA on the US side, demonstrates that; that’s one of our favourite positions, of course.

But certainly we think there’s a lot to learn, and a lot more that’s going to go through the clinical process, because western medicine, as you know, you know, it’s a not invented here process. So if they don’t know it, then it can’t be true. So this has to go through the proper processes, as we say.

James West:   Okay. Let’s talk a bit about what, how do you allocate capital? Where are your areas of focus, where are the areas that you stay away from?

Todd Harrison: Yeah, no, great question. So we look at the capital chain sort of, with the Canadian majors listed on the US as being obviously the most well-known, the most, you know, I guess, endeared in the perception of the public. But as you look at the Canadian majors that are listed in Canada, then we find, I think, a lot of relative value there. And as you go down that food chain or downstream, as we say, the less liquidity there is, the less institutional presence there is, themore of a relative edge we find. The more price mismatching we find down the stream.

So it goes through the US, and we’ll see more migrate to the US, obviously we’re seeing that now. But ultimately we look at Canada, we look at the biotech side, which is where we have about a third of our capital right now. We think biotech is about to take the baton in terms of efficacy-driven solutions, right? So we see the beverages, the nutraceuticals, the consumer packaged goods on one side, and certainly very exciting on the other side, we see efficacy-driven solutions.

So we look at that as an exciting space in Australia and we think is coming up on the tail end in terms of future markets.

James West:   So, it sounds to me like you think that the bigger feature is on the medical side, more so than the recreational side.

Todd Harrison: Well, we think the future’s on the wellness side, and we think wellness had a pretty wide berth, and we don’t really differentiate between the buckets in terms of opportunities, because we believe that a fair amount of self-medication has been going on through the years. This has been a very misunderstood, a very demonized drug. There’s been a fair amount of misinformation and propaganda that’s been put out into the marketplace, and I think as people understand that this is actually good for you, this is efficacious, that this is therapeutic, that it’s going to open up all sorts of new markets and that’s where we’re focused on.

James West:   Yeah, that’s incredible. You and I are on the same page in so many ways. Do you consume CBDs as a matter of personal wellness?

Todd Harrison: I do. You know, I’ve made no bones about it, I actually got away from a lot of the prescription poison with my medical card in New York State, and certainly a big proponent of this as an alternative therapy. The side effect profile is diminutive relative to what sort of we grew up on in terms of medication. So I think this is going to really help and save a lot of lives going forward. When you look at things like Florida, with the elderly population, being really Ground Zero for cannabinoid wellness; three and a half times the national prescription average – I mean, this is going to really ripple through society in ways that I don’t think people are prepared for.

James West:   No, I could not agree more. I tell people that just imagine a world where every single living man, woman, child and pet has CBDs in their medicine cabinet, and that is nothing less than the full potential of this market, just as you say, on a wellness side. So that’s great. I’m so glad we’re meeting; it’s been too long. We’ve got to get together.

Todd Harrison: Yes.

James West:   So what’s the – what are the big sort of opportunities that really excite you that might be under the radar of the average investor and that we probably haven’t even talked about too much on our show?

Todd Harrison:      Yeah, no, I think that two things. One, from a top-down macro standpoint, the idea that, you know, there’s probably, if you’re rolling all of the IPOs that are coming to market – and there’s a lot of IPOs that are coming to market in the next six weeks – but if you roll all of those into the public market cap space, we’ve been saying it’s about $100 billion of global equity market cap. You look at cannabis right now, is a $300 billion cash crop, so if you contemplate the optionality of the end products and use cases, you know, we don’t see any reason this can’t be a $2 trillion to $3 trillion market in ten years.

So, by orders of magnitude, we think the stock market is offsides, here, but in terms from bottoms up, we do think, as I alluded to before, we think biotech is going to be the next sort of leader in Phase 2 of this secular bull market. We have holdings like GW Pharmaceuticals, Corbus is another one even though it’s down today. We own these positions; we think they’re going to take the mantle or the baton, rather, in terms of this next leg of the race.

James West:   Wow, that’s awesome. How do you feel about the biosynthetic generators like Gingko, that’s owned by Cronos, and Hyasynth, that’s partly owned by Organigram. Do you think those companies have a huge future?

Todd Harrison: Yes, absolutely we do. We actually like Cronos because of this deal, and certainly Organigram is one of our core holdings in Canada. Village Farms is another one, CannTrust is another one…we think those are sort of the chosen three that is going to get the love as more people do the work. But we think biosynthetics are sort of the future for things like cosmetics and vanity more so than maybe, you know, the edibles or the beverages. But certainly, they’ll have their applications. It’s going to save money, it’s going to save time, and we have some of those names in our portfolio as sort of the biotech side of the equation that we think is going to take the next leg higher. So biosynthetics certainly have a role in the forward future of cannabis, in our opinion.

James West:   Sure. Do you think that there’s much risk in the US marketplace in terms of over-supply of cannabis causing price compression that will ultimately have a calming effect on the number of companies able to stay above water as a result of that?

Todd Harrison: Well, certainly on the supply side, and we’ve kind of made no bones about our point of view that this isn’t about farming as much as it is about the major LPs are really biotechs in drag, and they’re nutraceutical companies and beverage companies, and have sort of the optionality of the revenue streams in front of them, which is very exciting. We try to stay clear from the front end of that, because we do believe that cannabis, if not a commodity like hemp, is certainly commoditized to a degree.

But we differ from the conventional wisdom that this is a negative for the space; we actually think it’s one of the more bullish elements going forward is that the API, the input costs, are going to go down as the price of cannabis goes down, which you’re going to be very helpful on the back end from margins for companies that focus on things like that. The CannaRoyalties of the world, which we own, and a number of other companies that are focusing on a back end. One of the reasons we like the MPX/iAnthus marriage so much is, MPX, their extraction routes and sort of what they’re doing there on the product side.

So we’re very excited about that. I know you didn’t ask me about it, but certainly they were two, 5 percent positions of ours that got married or are planning to get married – we couldn’t be happier about the deal. We’re big fans of both Hadley and Ben.

James West:   Yeah, okay, actually, I was going to ask you about that, because we had Hadley here just before you, and we’re having Scott Boyes here just after you. So tell me about the features of that deal that, from an investor’s point of view, are net positive.

Todd Harrison: Sure. So the number one, you know, focus of ours is really the limited of overlap on the footprint, right? I think it’s just Massachusetts that they overlap, there. So they’re really expanding their reach, they’re really looking at a bird’s-eye view of sort of their strategy. So, that’s number one.

Number two, we look at the extraction side of MPX, really, that’s where the margins are, and that’s a really smart strategy to be going forward in the brand side of the equation. It certainly is where we want to be investing in on a forward basis. There’s finally, you know, by our pen, MPX will do 100 million next year, maybe 300 million in 2020. This is accretive, and if you’re going to make a case for the equity prices of a lot of these companies, you have to sort of buy into the idea that they’re going to buy their way, merge their way, to better multiples through accretive deals. And this certainly probably checks that box, you know, on a few levels.

So we haven’t sold any. We have both iAnthus and MPX, and we’re holding onto both for now. We think both stocks are the stock comes out of this new tire.

James West:   Wow, that’s interesting. You – all the names that you’re in, I’m in. it’s like, it’s just amazing. Are there any companies or situations out there that you think are worthy of warning to investors that you feel comfortable talking about, or is that something you’d rather stay away from?

Todd Harrison: You know, it’s not so much, you know, we don’t hedge. We have non-correlated hedges in the S&P and the NASDAQ against a lot of cannabinoid wellness holdings in our portfolio. We think it’s a little early on the curve to be short these names. I mean, we’ve dabbled on the short side; there are some valuation discrepancies, but having, I’ve been trading 30 years, seen a fair amount of bubbles and busts in that time, and it’s not a valuation story right now as much as a footprint story and as much as really trying to meet that chasm between perception and reality.

We think there’s certainly a lot of noise out there still, a lot of images of Cheech and Chong when you think about cannabis, and until we see sort of the awareness that this is actually something that’ s very good for society, it’s very good for jobs, it’s very good for tax revenue, it’s very good for the patients, and it’s certainly going to be very good for investors. So we think we’re in the early innings, still; if there’s any concerns, possibly, you might throw out there that there’s a  lot of companies coming public on the US side. We’d like to call it the fangification of US cannabis, is in the process of occurring.

So there’s a lot of paper coming in the next six weeks, so there might be a short-term saturation, but again, we think we’re early in the story.

James West:   Huh. Todd, you have been a very enlightening guest, and I’ve really enjoyed this conversation. I would like to come back to you regularly and I would like to come down to New York to meet you and take you out for a beer or lunch or dinner or something, but we’re going to leave it there for now. I’m definitely going to be coming back to you regularly. Thank you so much for your participation today.

Todd Harrison: Thank you. Thank you, big fan of what you guys are doing.

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