November 7, 2018

The Big Short’s Danny Moses: Investment Views of the Future

Midas Letter
Midas Letter
The Big Short's Danny Moses: Investment Views of the Future

Private Investor Danny Moses, featured in the 2015 film The Big Short, discusses investment opportunities in the cannabis space. He has been a long-time supporter of the cannabis industry and hasn’t “ever seen an opportunity like this, from an investment perspective, in my life.”

Moses works with Merida Capital, which invests in the ancillary cannabis space. Moses shares his thoughts on potential US cannabis catalysts such as the US Midterm elections and the Farm Bill. He anticipates significant consolidation in the US market when cannabis is deregulated or legalized at the federal level.

Consequently, he believes US cannabis companies with strong regional operations or who have undertaken significant vertical integration and consolidation, will become major national players.



Unknown Speaker:   Danny Moses. The optimist of the bunch, and a hell of a trader, which is the only reason they put up with his bullshit optimism.

Unknown Speaker2: You take longer with the wrong number than anybody else. It was this guy from Deutsche who was talking about shorting housing bombs.

Unknown Speaker:   He wanted to short housing bombs?

Unknown Speaker2: That happens like five times a day till somebody gets their own front point. We should change our name.

James West:   Hey, welcome back. My next guest is probably one of the most recognizable figures from the famous film, The Big Short: Danny Moses is currently also a very long investor in the cannabis space. Danny, thank you for joining me.

Danny Moses:  Happy to be here. Thanks for having me.

James West:   For those who didn’t see The Big Short, just give me an overview of the role you played in it.

Danny Moses:  So I guess the translation from the book to the movie was a little bit different; I was much more intense in the book. The book focused on, you know, 8 to 10 people that Michael Lewis decided to focus on, that were involved in shorting sub-prime bonds. And then from the book to the movie, basically took that to the big screen. Adam McKay obviously somehow was able to translate that book into a movie that people could understand, and the movie I was portrayed by an actor, Greg Small, who’s a great guy, but I think from an intensity perspective, the book kind of gave a much better picture of my attitude during the crisis, versus in the movie, where I was looking for the next best restaurant where we were going to eat, and so forth.

So it was a lot of fun, and it certainly depicted us in an accurate manner in terms of our team. Once in a lifetime type trading opportunity, so it was great. I have zero comnplaints.4

James West:   Okay, and now so tell me about your current role?

Danny Moses:  So getting out of the hedge fund business a couple of years ago, I decided that I would take a look at cannabis just as an investment opportunity. And me, like many other people who hadn’t been involved in cannabis for the last five or seven years, thought of a cannabis opportunity as your friend from college or high school that moved to Colorado, that decided to grow weed and sell it, and it really wasn’t a real business, so to speak.

And after I got over kind of the stigma, obviously, that ignorance that I had about the space – so, to realize that there’s a lot of good stocks year to year, there’s health benefits, there’s economic benefits, there’s politically elements in the space, and kind of teamed up with a group of people at Merida, and kind of got dipped my toe in, my ankle, my knee, now pretty much up to my hip in this stuff.

And so I found it to be an exciting, emerging space, and I don’t think I’ve ever seen an opportunity like this from an investment perspective in my life.

There’s still a lot of hair on it obviously; it’s not federally legal, we all know that, I don’t have to go over that on this show obviously. But it’s pretty exciting, and I’ve met a lot of people along the way, people who have been working on it for more than five years, ten years in some cases, and I think it’s just incredible to watch the transformation.

James West:   Mm-hmm. Interesting. So is Merida invested in primarily US cannabis opportunities, or Canadian and US opportunities?

Danny Moses:  Mostly US, and mostly the ancillary stuff, so the packaging, the audit, the compliance tools. It’s a wide range, and now they have, you know, they weren’t touching the plant initially, and now they’re touching the plant in various ways. They have a piece of the license in New York, and other states as well, and there was just no way to kind of avoid it over a period of time. But what’s really interesting about Merida is, most of the investments in the portfolio, they have two different funds, are private; some are actually public, and most of the public equities, at least until recently, are really private companies trading in a public vehicle that are either trading on the bulletin board or CSE or something, and they don’t have access to traditional capital.

So companies like Merida have been able to supply that, and they’re getting great terms for doing it, as companies who were actually private, but Mitch, who runs Merida, has a great way of actually blending his entire portfolio together. So the whole cross-sell lab test e-company, to packager, to grower. So there’s a lot of beneficial interest within the portfolio, and watching that happen in real time is really interesting.

James West:   Sure, I bet. It’s interesting that people seem to perceive the investment opportunity is more or less solely Canadian because of the Federal prohibition in the United States, but you’re telling me that as a hedge fund – I take it you’re based in New York?

Danny Moses:  Well, I’ve worked with a fund that’s in New York. I’m based much in Westport, Connecticut, and I’m not a hedge fund, but I do have personal investments, obviously, in Merida and other companies in the States.

James West:   Okay. So how does the Federal prohibition against marijuana in the United States affect what you can invest in, where you can invest, and the risk as a result of Federal prohibition?

Danny Moses:  It’s interesting. Obviously, the biggest hurdle is the lack of access to the bank system. So obviously, everyone knows that the FDIC can’t back a bank that’s dealing in a federally prohibited substance. So because marijuana is a Schedule 1 drug, that obviously falls into that category. Therein lies the opportunity; if you’re comfortable enough to make an investment in a company and you’re lending them, 4you know, not just buying their stock, but you’re actually lending them money in the private markets, you’re going to get great returns because the access to capital is not there.

So because it’s federally banned, you’re obviously taking a risk, both from money and your reputation, but I think you get to a comfort level once you realize these are real companies with real revenues. Now, maybe some of the revenues are coming in the form of cash back from some of their customers; that’s an ongoing issue that should be resolved, but just imagine, even if you get a state protection laws coming in at some point which Cory Gardner had proposed, the Senator from Colorado, you would allow the banking system – because right now it’s credit unions, state charter banks are pretty much providing capital and/or private individuals like myself.  Imagine if that were to change from a cost of capital perspective.

What would happen to these companies’ valuations, if you were actually able to – if banks could lend money in a traditional manner to these companies, what would happen to the present values of these companies? So I think the risk is worth the reward, or the reward is worth the risk, I should say, for these companies right now. But that being said, you’ve got to be very selective. You’ve got to really understand these companies. You’ve got to read their 10Qs and 10Ks when you can get them; talk to the managements, look at the corporate governance, and so forth. So it’s not just as easy as investing in cannabis and ignoring the federal laws, it’s more like, are these real companies with real revenues, real Boards, real corporate governance to give you a level of comfort to go in and invest.

So I’m invested in a couple of Canadian equities, public US companies, private US companies, so pretty much run the gamut. What’s really interesting is, the last even four to six weeks seeing a ton of deal in the technology space; people that are leaving the traditional Silicon Valley start-ups and coming into cannabis with that brainpower and applying technology to the space, and that’s really interesting to see, because those are going to be higher multiple type companies, because they don’t really touch the plant at all. They cater to industry, so a lot of moving parts here, but the irony is that the Federal government ban is kind of allowing, I think, a kind of last flux of resources and capital to come into the space before it does make it mainstream.

And I’m confident, whether it’s this mid-term election that’s coming up that’ll obviously see some of a tailwind, or something in the future, that the only way is to become legal in some form or fashion. So, I’m pretty confident about that.

James West:   Sure, sure. So what, from where you sit in the US, is the timeline to Federal de-prohibition in the US?

Danny Moses:  It could come – we’ll see what happens with the House and with the Senate, but barring those things, you have the Farm Bill coming hopefully the first week in December, and if it’s extended, maybe it’ll be early Spring, so maybe it does not get done in a lame duck session, but it doesn’t have to be a legalization, it can be a de-scheduling, as you know. I think if you can get state protection laws coming in and protecting the economics of cannabis in those various states that have it, 30 states that have some form of medical or rec of some sort, you will basically solve the issue. That’ll be a green light, so to speak.

So it’s going to be a work in progress. I don’t think there’s one answer or one particular bill that will solve it, but I think we should get a pretty good feel in the next six weeks, both in the mid-term elections – the last states obviously a lot of valid measures that are going forward, and then with the Farming Bill, which basically will legalize hemp and hemp-based CBD, which is an area that I’m very, very focused on, and so is America. So a lot of exciting things to develop. I just don’t see the genie going back in the bottle, in this case. This is too much money at stake now; we’ve seen a bunch of deficits, we’ve seen to the estimates on a national basis, at least in the US. We’ve already seen, at least if it’s locally, where cannabis legalized, what it’s done for schools and budgets, and obviously, large US companies like Constellation Brands and Molson and these guys are investing in this product for a reason, and that’s because they’re seeing the market where alcohol is being cannibalized, so to speak, by cannabis. They realize that there’s a future here, and they need to play offense/defense.

And so dollars being coordinated, you don’t put $5 billion or $4.5 billion dollars into a company if you’re Constellation without a thorough, thoughtful plan. So those things, the horse has left the barn, and I’ve said this before: I think we’re in the third inning, and whether it’s some bill that passes quickly, I don’t see a fourth, fifth, sixth or seventh inning; I think we go straight to the eighth inning and interpret a wall of capital. People are just looking for an excuse.

James West:   Yeah, that’s interesting. So there was a full page ad taken out in the Wall Street Journal who was imploring the President of the United States to please de-prohibit cannabis federally because he felt that the opportunity was being lost to the Canadian investment universe. How would you categorize that?

Danny Moses:  I think that obviously the state of California alone is as big as Canada, if not bigger than Canada. Obviously. So that goes without saying that there’s a huge opportunity. I don’t think yet that the US is losing out; people aren’t going up to Canada to get cannabis and bring it back, so think it’s about, what is the opportunity in front of us, and I totally agree, I don’t think Trump really understands much, but maybe he can understand that 93 percent of American medically approved cannabis, and 63 to 65 percent and growing every day approve recreational for adult use.

And so like I say, I think it’s a global – I think it checks a lot of boxes, economically, form a health perspective, politically. And so yes, the answer is, US should seize the moment. There’s other countries that are obviously way ahead of the US, and we should be ahead of the pack. And the fact that Germany has built health laws that reimburse people for using cannabis, the whole formation around that, the whole structure is a positive. The US should pay attention and replicate it, and like I said before, the horse has left the barn; so the sooner that the government acknowledges to approve a drug, Epidiolex, like that, I mean, think about it: it works in epilepsy. There’s obviously medical benefits to this drug.

So that’s a whole other category we could talk about, but I think that’s going to be obviously be very interesting trade on its own merits. And Big Pharma companies know it, and they’re going to be, and big tobacco companies know it, and you’re going to start to see investments. As soon as there’s legalization of some form, we’re going to keep seeing that. So again, there’s a lot of capital waiting, and the sooner the better that people have access to it.

James West:   How would you define the split in terms of the whole global opportunity in terms of medical relative to non-medical, recreational, other uses?

Danny Moses:  So I think that certainly I don’t condone smoking in minors; I think it probably does have a detrimental effect on the brain, so let me just say that from the outset. I think that states rights, 10th amendment type stuff, should be given the right to legalize cannabis if they deem it for medical or recreational purposes. I think we’re learning over a long period of time that alcohol is much more dangerous to the body; cannabis, there’s benefits there.

So I’m indifferent on how states, I’m a liberal guy, and I’m differ how states want to see it. It’s not going to happen on a federal level, but the states decide what’s best for the community, what the people that live in those local jurisdictions want. And so I just think it’s done. I think there’s a restorative aspect, though, that’s really interesting, you know, I’m sure you guys know obviously the history of cannabis becoming a Schedule 1 drug in the first place, was racist policies and so forth, and it was also back in the 30s, the fear that hemp itself could replace other industries. I mean, the timber industry, the lumber industry, you guys are well aware; construction, hemp can be used in that. Clothing, hemp can be used in that. So there was a lot of things that led to this Schedule 1 process, so it would be great to see the United States take control of that. At the same time, they want to legalize cannabis, I would implore these local jurisdiction to have valid methods also to throw out felony convictions for people whose lives have been ruined because they had a joint on themselves in the 1970s and 80s.

So there’s a lot of moving parts here, but I think we can solve a lot of social issues, economic issues, at the same time. That’s my long-winded answer, I don’t know if I answered the question.

James West:   Yeah, no, you did. And finally, are there any companies in the US that our sort of audience should be partiularly focused on as sort of being above the cut in terms of the rest of the landscape?

Danny Moses:  So obviously in recent weeks we’ve seen several companies go public that the scarcity value for stocks both in Canada and the US is somewhat disappearing; the ability to express this cannabis game is expanding. I think that’s one of the reasons we’ve had to sell off not just just to sell the news event on October 2-17th in Canada, I just think there’s other alternatives.

But most recently, Curaleaf went public, and yeah, it got a 4 billion valuation, 4.5 billion valuation or something. I’m most interested in the smaller players in the US. Liberty Health I think is a very interesting company, that traded in the USLHSIF; obviously it’s up in Canada as well, and they used to be a subsidiary of Aphria, as you guys are aware. I think it’s the cheapest name. MPX, which is currently being processed to be acquired by iAntus, that combined entity, a multiple basis. So Liberty and the combination of iAnthus and MPSX are much cheaper than what I’m seeing right now both in US and in Canada, and I think what you’re going to see is a continued consolidation among the large US companies. So as these companies become public and they have currency to exefy their companies, they’re 4going to all try to vertically integrate themselves into these things, because they have to try to validate these valuations.

So I think the one-off, mom and pop growers in these various states, whether you’re looking at Massachusetts or Maryland or Florida, California, they’re going to consolidate. So you want to own the bigger companies that you can; at the same time, from a valuation perspective, Liberty, iAnthus and MPX are on my top, and then also on the ancillary side, I think Kush Bottles is extremely interesting. They do packaging, they now do gas delivery for extraction, an they are literally in the middle of everything. They do everything but touch the plant, and you know, it’s a $400 million company that trades OTC, an I think that’s I’m sorry, I think it’s known now as Kush Health.

So those are the kind of names I’m most interested in right now.

James West:   Okay, Danny, that’s great. I appreciate your participation; we’d like to come back to you in a short period of time and see how you’re doing. thank you for joining us today.

Danny Moses:  Thank you for having me.

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