VIDEO: CB1 Capital Management CIO Discusses how Midterm Elections Impact US Cannabis Landscape
CB1 Capital Management CIO Todd Harrison discusses the impact of the US midterm elections on the American cannabis space and the industry more broadly. Harrison suggests the midterms will be positive for cannabis producers and users and indicates that the result of Michigan’s cannabis ballot question might illustrate the direction the nation is headed in terms of legalization. He believes the market downturn the industry experienced in October is part of the process of moving from retail to institutional investors. Harrison is still enthusiastic about investment opportunities in the space, pointing to the numerous international markets coming online and believes the medical side has significant untapped potential. Harrison expects the large Canadian companies to make accretive deals as soon as the US decriminalizes; however, he anticipates five to seven industry leaders in the North American cannabis space.
James West: Hey, welcome back to Midas Letter Live. My guest in this segment, returning, is founding partner, Chief Investment Officer of CB1 Capital Management, Todd Harrison. Todd, welcome back.
Todd Harrison: Thank you, James. Always a pleasure to see you.
James West: Todd, it is a pleasure in my case as well. Now, we are on the eve of the mid-term elections, here; how is that going to affect the cannabis industry and cannabis stocks more broadly in the United States and Canada?
Todd Harrison: I mean, we think it’s going to be a positive. We’ve been saying this for some time, and I think you and I spoke about this before we started taping it, that for some time I thought that President Trump would actually de-crim before the mid-terms, for the obvious reasons that 93 percent of Americans support medical cannabis, medical marijuana, and this is also, from a political standpoint, this is probably the most populist issue of our generation, so certainly a populist President would want to get a hold of it.
But we think that, you know, what we’re going to see tomorrow is going to speak volumes about the American appetite for getting their hands on God’s medicine, and certainly we think Michigan in particular will tell the border tell in terms of what it could portend for US legislation.
James West: Sure. So then in terms of, at the state level, do you think that there’s going to be any changes as a result of voting tomorrow at the state level?
Todd Harrison: Well, there’s four states that are up: it’s Michigan and North Dakota and Utah and Missou, are all up. Some of those re medical, some of those are recreational, but again, you know, I think we’re going to see more of the same in 2019 Massachusetts, New York, New Jersey, the eastern seaboard. We call it the inside-out uptake as well as the outside-in globalization. So it’s seemingly set up to meet on the borders of the United States of America, but we, again, think that’s going to change. I don’t think you’ll see John Boehner out there hawking stock picks for cannabis companies unless there’s de-crim on the horizon. So we’re paying pretty close attention to what’s going to go on in the next couple of weeks.
James West: Sure., What do you think the chances are that President Trump might actually undertake an executive order to de-prohibit cannabis at the federal level, just unilaterally?
Todd Harrison: You know, again, we thought that that could happen, maybe even as a way to keep some people away from the polls ahead of tomorrow, but obviously that does not happen, and you heard some rumblings about how this is going to, de-crim is coming after the mid-terms; I don’t know. I mean, anytime I’ve tried to discount what this President would do, it’s sort of been a lesson in humility.
But I think, you know, if you look back at the broader trends from a political standpoint, this is really the last bipartisan issue, maybe ever, right? I mean, you’ve got 93 percent of the constituency supportive of it, but even if the political process continues to get bogged down, and even if the UN potentially continues to drag its feet, here at CB1 we’re stocked at against the efficacy. I mean, we think this is going to be, you know, medicine across the spectrum for a wider range of conditions. So we’re content to let the FDA sort of play through here, because we feel pretty good about where it’s going to end up.8
James West: Sure. Todd, I’ve noticed that in several of the last sessions, the top traders in the cannabis complex have all been US companies, US operating companies trading in Canada. And to me that seems to sort of signify that there’s a real rising tide of capital coning into the market in the cannabis market through the Canadian markets. Is that your observation as well, and what do you think is driving that sort of incremental acceptance of investing in cannabis despite the sort of Federal taboo?
Todd Harrison: Well, I think actually paradoxically, it’s because of the Federal taboo. I mean, there’s a lot of institutions that won’t touch US names because of the Schedule 1 status of cannabis. So you know, we always talk about the four arbitrages of our thesis, is one of time versus policy; price versus institutional participation, is the second; perception, getting high versus getting well, the third, and liquidity from an investment standpoint, the fourth. But focusing on that price arbitrage, you know, if you look at the front page holders in a lot of these Canadian majors, you’re going to see the Putnams and the Vanguards and Fidelities; a lot of the big boys are out there. You don’t see that in the US names.
So we do think that that migration will happen. Now, what I do think is getting lost on a lot of investors out there is that, as soon as the US de-crims, you’re going to see Canopy and Aphria and all the rest of them turn buyer, right? So Canada is going to be a way to play US, right, but it’s just not there yet. But I don’t think that you can really justify the valuations in a lot of these Canadian majors unless you’re going to make the case that they’re going to go out and make accretive deals, right?
So we think that’s all in front of us. We think that there’s a pretty significant shift of ownership that’s occurring right now, and it’s facilitated by the 40 to 50 percent drops that we’ve seen in a matter of weeks, right, since I was last on, top ticking the entire cannabis space. But we’re down about 40 percent in a lot of these names, and we think that’s all part of the process to transfer ownership from the retail holders to institutional hands. And we think that’s going to be a pretty significant theme over the next five, ten years.
James West: So do you think that with Federal de-prohibition that there’s going to be a land rush, so to speak, from Canada to the US?
Todd Harrison: Sure, yes, I do, and I think it’s smart, right? I mean, they’ve got the currency in their share price, right? So they can turn buyer. We think a lot of those relationships have already been formed; there’s been a lot of courting, a lot of, maybe, under, you know, behind the scenes sort of conversations that are going on here. But certainly, you know, we think the fang-ification, if you will, the fang-ification of the US operators is going to unfold in the next, call it, couple months, right. You see all of these IPOs coming to market, these are the leaders. They’ll join iAnthus, which we think is the leader on the US side, but certainly Green Thumb, and there’s a few others, True Leaf, we have positions in these names, but ultimately, you know, a lot of talk about the share overhang, there’s a lot of private stock that’s going to come – locked-up stock, we call it, on Wall Street – that’s going to come free, and this is all part of the process of transitioning ownership from the private hands to the institutional hands.
So we think this all natural. We’ll figure out valuation and things like that going forward, but you know, the table that’s being set now is going to be used for a feast, I think, for the next decade.
James West: Sure, okay. So, fang-ification is interesting concept to me. Are you suggesting that we’re going to see these billion-dollar companies become multi-billion-dollar companies in short order?
Todd Harrison: Well, I don’t know about the order; I mean, certainly, you know, and we always tell the story about how for everybody who’s buying Canopy at 38 hoping it goes to 68, there’s somebody who owns it at $0.38 who really doesn’t care at this point. And certainly, we think that process is going to play through on the US side, on the Australian side, through Europe. I mean, for everybody who’s talking about how the cannabis bubble has popped, seems to be forgetting that you have entire continents coming online, right? Africa, Asia, I mean, these are all now just coming to the table, so this is a long, global tail that we’re talking about.
But yes, I do think from a fang-ification standpoint, you’re going to have maybe the five, six, seven leaders overall, and I think that’ll be part US, part Canada at the end of the day. But it’s going to be a footprint across he world, and we think, through that lens, you know, near-term valuation discrepancies aside, we think the best is yet to come for a lot of these names that are coming to market.
James West: Wow, that’s great. So what do you make, for example, of the UK? Let’s take that as an example: you know, six weeks ago, they were saying never cannabis, cannabis never, now they’re saying cannabis yes for medical reasons. I mean, that’s, what, 80 million person market strong, somewhere like that? So, you know, the companies that get in there and actually get licenses and start selling cannabis in the UK market, do you think those are the potential to become like the next Tilrays in the UK scenario?
Todd Harrison: I don’t know if you want to become the next Tilray, and I’m just, you know, I think that that’s sort of, put that conversation to the side, but what I will say is that we do believe that there’s going to be a bifurcation, and we talked about this the last time I was on the show. On the one side, you’ll have the nutraceuticals, you’ll have the beverages, you’ll have the consumer packaged goods, and certainly wellness, right? That’s wellness. You know, a lot of people who consider themselves adult use or recreational, we think they’re actually medical usage but self-medicating because of the Schedule 1 nature of cannabis for the last 90 years.
But on the one side you’ll have wellness sort of in sort of in airports; on the other side, you’re going to have wellness through more of a clinical lens, right? And this is something that, you know, since I was last on, we were out at CannMed out at UCLA with a lot of the leaders in the field on the forefront of the medicine, and the points that were made were all valid, right? If you have somebody in your family who’s genuinely sick and who needs medicine, you’re not going to go to a dispensary and have some guy you know, cuff the market with this strain or that strain; you’re going to go through the route where you’re going to get it from your doctor, prescribed by your doctors, who’s going to go through insurance, you’re going to get it at a pharmacy, and it’s going to be consistent, and it’s going to be pure, and it’s going to have the same standardization as the last batch that you took.
So this whole process, we do believe, from a medical efficacy standpoint, indication by indication over the next decade, you’re going to see this migrate from drugs from state dispensaries to medicine prescribed by doctors covered by insurance. But certainly there’s going to be room for both markets, ultimately.
James West: So if you were to make a call from a global perspective, which one do you think is where the bigger money is going to be? Recreational, or medical?
Todd Harrison: Ooh, that’s a tough call. We’re going to focus primarily, for us, we like the medical side of the equation; we think that that’s really the untapped market, right? Everybody seems to understand the cannabis trade, or at least they think they do, insofar that maybe this isn’t an end product, cannabis flower, but an ingredient in and of itself that will ultimately go in the end products such as the consumer packaged goods, the beverages, and the nutraceuticals.
But we think from, you know, our in-house metrics follow the science; we think if you follow the science, it’s going to lead to remarkable revolutions in the way diseases are treated. And I’m not talking about masking the symptoms of a disease, I’m talking about addressing the underlying condition, right? The inflammation-triggered diseases, I mean, this is really something that, I think people are offside. The medical community, certainly Western medicine, when we tell them our thesis about how this is going to disrupt health care, you know, we get a lot of funny looks still, and that’s a good thing for our thesis. People are still not believing that cannabis is actually wellness, that’s it’s actually efficacious, and that it’s actually going to do something remarkable for our country and for the world.
James West: So do you think that the, you know, that the industrial hemp is making broad inroads now, it’s legal in 50 states, you’re now allowed to ship CBD across borders across 50 states as long as it’s derived from industrial hemp as opposed to marijuana. Now, I find that remarkably naïve and sort of misleading, because no matter how you slice it, the industrial hemp plant and the marijuana plant, is essentially cannabis sativa. And to say that you’re only going to allow distribution of CBD products from industrial hemp is disingenuous at best, because, you know, if you extract the CBD from a low THC plant and concentrate it to 30 milligrams per millilitre, or you extract it from a 15 milligram THC plant, and it’s essentially the same thing. So I mean, it strikes me that –
Todd Harrison: I’m shocked that you would suggest and you would mention the US government and disingenuous policy in the same breath. But I mean, let’s think about this, right? In 2016, if you go back and you read the DEA’s letter about why they didn’t reschedule cannabis, it was brilliant on their part. They took political cover, they said ‘It’s not our purview to say whether there’s medical efficacy; that’s the FDA’s purview. If and when they demonstrate efficacy, we will reschedule cannabis’, right? And this was in 2016.
They went out of their way in that letter to highlight potential evolutions in the childhood epilepsy market, and sure enough, we’ve seen now Epidiolex pass in June and the Schedule 5 from the DEA more recently; yet cannabis is still a Schedule 1. So why is this? You know, I think ultimately, just follow the money, right? The only way the US government could tax this is if it goes to the FDA, and think indication by indication, that’s exactly what will happen, but we do see a grand bargain on the horizon. I just can’t speak to when that’s going to happen.
James West: Sure. All right, Todd, well, you’re very insightful as usual. We’re going to leave it there for now and come back to you in due course. Thank you very much for your participation today.
Todd Harrison: Yes, thank you, sir.
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