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CB1 Capital Management CIO on Aphria Inc (TSE:APHA) and Green Growth Brands Ltd (CNSX:GGB) Rumours, US Government Shutdown

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

CB1 Capital Management CIO Todd Harrison provides his take on the recent announcement that Green Growth Brands Ltd (CNSX:GGB) (OTCMKTS:GGBXF) is planning a hostile takeover of Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E). Harrison also addresses the current federal government shutdown in the United States and how it impacts the cannabis landscape. He notes that the DEA and FDA are still operating and suggests that without updated guidelines from the federal government, the cannabis space could see a crackdown on illegal operations. Harrison emphasizes that the longer the shutdown lasts, the greater the impact on the cannabis space, as an operational government is crucial for necessary banking reforms to be adopted. He shares his enthusiasm for Canadian player Organigram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) (FRA:0OG), indicating the company’s management team and biosynthetics emphasis make it attractive for CB1 Capital Management.

Transcript:

James West:   Todd, are you with us there? There he is. Hi, Todd.

Ed Milewski:  Todd, how you doing?

Todd Harrison: I’m doing all right. How are you gentlemen doing? Happy New Year.

Ed Milewski:  Happy New Year.

James West:   Trying to get my noodle back in the game after barking up half of my lung from some pestilence I got well down on the coast of California there. I don’t know what’s going on. How are you doing?

Todd Harrison: Better than that, whatever that means. I’m glad I don’t have it. But no it’s good. Happy for the new year.

James West:   Yeah. Happy New Year to you. Todd, we were just discussing the Aphria and Green Growth Brands transaction and I was wondering if you had any participation in it first of all, and if yes, then let’s hear about that. And what’s your expectation for the outcome of this takeover offer, which it’s being suggested in certain circles that is not as arm’s length as it is being portrayed to be.

Todd Harrison: Yeah, so we have positions in both. Green Growth we built a bit of a position. In Aphria we’ve had a trading position, we talked about it last time I was on your show, playing through calls. I just you know, we think the assets are worth probably double what the stock prices worth right now. I don’t have any insight on Green Growth and the inside track there. I think there’s a lot of shorts that are spreading rumors. We’re just looking at from an asset standpoint we think Aphria has got some value and playing that through defined risk and Green Growth we like the management and we like the backing and certainly an aggressive move but you know with Aphria down here who can blame them for trying to get it at that price.

James West:   You bet. Okay. So do you think that Aphria shareholders are going to tender to that offer though?

Todd Harrison: I don’t know, you know. Like I said, we think the assets alone are probably worth 2 x what the stock price is worth but certainly reputational damage has been done. It would be interesting to hear is that that retort from the company that was promised a while back. But again, with a New York Stock Exchange company, you can’t expect them to get on get into a Twitter war over the future of their company. So, you know, this is the big league. This is where the adults come to play so hopefully they’re going to continue to operate in a manner consistent with the New York Stock Exchange listed company.

James West:   You bet and so all this weakness that we saw at the end of Q4 2018 in the Cannabis space largely driven by global macroeconomic weakness. What do you see happening in the first few innings of 2019 in terms of all that?

Todd Harrison: Yeah certainly, the macro landscape hasn’t held but I think there’s a fair amount of tax laws selling. I mean we saw it was pretty aggressive. I mean a lot of these names. I mean you have to remember, you know, the global cannabis proxy that we follow had two separate 50% plus downdrafts in 2018. That’s pretty amazing. It ended the year about 55% lower. So a lot of tax loss selling into year end. A lot of these things are not quite liquid and you couple that with the retail ownership, again, a lot of institutions haven’t entered the space particularly on the US side.

So you see this outsized move to the downside, we think exacerbated by tax loss selling. So to see this move today is not all that surprising. We still think Canada, you know needs a couple of quarters to sort of build out and get its footing under it. But with this sort of declines that we’ve seen a lot of that’s probably baked in. Still think the U.S. is where you want to be and still think biotechs going to probably be the next kind of phase higher as these clinical trial start to come through the pipe this year.

James West:   You bet. Do you see the issue with and it’s just I ask this because we don’t really understand the implications from Canada with the federal government in a partial shutdown mode as a result of the disagreement between the President and the Democrats, if that persists and is it something that you see likely to persist, but if it does persist is that got any long-term implications for cannabis industry performance and if it’s not going to persist what’s going to bring a resolution and what does that imply for longer-term cannabis performance ?

Todd Harrison: Well certainly because of the way it shut down and the DEA still being up and operating, you know up and everything, there is that risk that you’re going to have some sort of a crackdown, but we think that’s going to be more about the illegal operations. We think the FDA also is going to come and crack down on a lot of claims, A lot of the the labels and what these are these manufacturers are claiming right? It’s going to be a lot like vitamins and supplements. It’s what you can claim. So, we think there’s going to be a lot of regulation. We actually think that’s a good thing as the industry starts to take shape.

But, you know looking forward, you know, obviously, you know, a lot of the catalyst that we’re looking for going into the new year surrounds things like banking reform. So, you needed a government that’s actually up and running to move these things forward and you know, so the longer this last the less positive or potentially more negative it would be for the cannabis space.

James West:   Sure, and what about the bigger macroeconomic picture globally? I mean certainly the trade war with China is the sort of the recurring theme, you know Brexit a recurring theme. Where do you see the whole macroeconomic picture evolving toward going forward especially as it pertains to global interest rates?

Todd Harrison: Well, I mean, I think it was the last time we were on we were talking about how I look at the world a bit holistically and go through these charts of all these countries and I go through the charts of all the sectors within the US base and what struck me was really the synchronized swim lower. I got these charts all broke and I’m talking China, I’m talking Germany. I’m talking the socks. I’m talking the home builders. So this has been taking place for a few months now so, you know, you know in the modern macroeconomics, you know through that lens.

I think that there’s going to be some rough sledding but it’s interesting to note is sort of the mirror image from last year. Remember last year at this time. We saw crypto ripping. We saw cannabis ripping. We saw equities ripping and everybody is real bullish and we saw how that ended. This year we see everything sort of cratering and everybody sort of expecting a bear market and looking forward with a lot of negativity. So maybe we see some upside surprises this year. Maybe not in the macro side, but I do think it’s going to be a big year for cannabis.

James West:   Great. Okay, and the price of gold has been rallying quite throughout out the last quarter of 2018 and into the New Year. Does that have implications? Does that scare you at all? Does that have any bearing whatsoever on your thinking, planning, etc?

Todd Harrison: It doesn’t really factor into how we’re looking at the world. I’ve you know, I’ve had a trading relationship with gold for a long time, but it’s not a core position. You know, I just think, you know people talk about it as being a defensive play. I agree in so far that it’s a rock and if you get into trouble you could hit somebody with it. But, I don’t necessarily look at it as an investment asset. It’s not so, I mean, I know I’m talking to Canadians here so I’m probably going to get slapped around but we just think there is better opportunities out there. With that said gold with probably rip about a thousand points the next time I’m on your show.

Ed Milewski:  Todd, from where you’re sitting in New York, do you see, are there a lot of private companies waiting to go public in the marijuana space that you know of? That you hear, this company’s coming public? Or is that window relatively closed right now because of the market conditions?

Todd Harrison: No, it’s a great question. We saw this heading into the fourth quarter with all the MSOs that listed. Obviously, you saw what happened to Curaleaf, and Acreage and Cresco and Harvest, a lot of these things came in 50% like a cut in half from their RTO prices. I think that really spooked the market. There’s a lot of paper that’s out there, you know for our money like we own those stocks that I just mentioned and we use price to our advantage to add more. We’re looking at sort of the our projections and our internal research on what we think they’re going to do in revenues in 2019, 2020 and we can make the case that as long as they execute that they’re cheap here.

But there is a lot of paper that’s waiting to come public. I know there’s a lot of bankers that are waiting for market conditions to improve before this paper will come public. But again remember where we are in the cycle. It’s so early in the cycle right now that institutions still can’t participate in the U.S side. So a lot of that demand is on the horizon in our opinion and as that starts to come through over the course of the next year or so, we think that the markets are going to lubricate an open on up and I’m going to see a lot of good companies come to Market and trade through a public domain. Again, we look at the public side because that’s how institutions are going to articulate their investment strategy and cannabis going forward, right? We think Putnam Fidelity Vanguard, all these guys are going to come in. They’re going to have to take a position as a growth hedge, especially with what we’re seeing in tech in the slow down. There’s not that many places where you can see growth and we think cannabis is certainly one of them.

James West:   Hmm interesting. Yeah. So Todd during the holidays we heard that or just before the holidays rather we heard that Tilray had really solidified its relationship with Novartis and we didn’t really get the reaction in Tilray’s stock that we expected and I’m wondering do you think that’s might be somewhat symptomatic of investor fatigue or at least investor caution in the face of the proliferation of non-performing IPOs in the final part of 2018?

Todd Harrison: You know, I certainly you know, one of the things I’ve been on the street 30 years and the reaction to news is always more important than the news itself and you could look at the Cronos and Altria deal and the reaction the mute reaction there and we sort of looked at each other and said uh oh, if this isn’t going to sort of spark the tape, what’s it going to take? But again to your end I think there was a lot of for selling, there was a lot of tax loss harvesting. That’s behind us now. I think that we’re going to continue to see deals coming through obviously.

You know Tilray, Novartis they’re each ponying up some money. It’s a little bit of a different dynamic and of course you have this lock up stock that everybody knows is coming in the coming months. So, you know, I don’t know I still think Tilray is sort of you know, I think it’s done a lot of damage to the psychology surrounding cannabis and it’s not a name that we own or want to own here. We think there’s a lot of better companies you mentioned Organigram, it’s one of our positions. We think Greg’s great. We think the biosynthetic side is great and we think the brand is terrific and so, you know the names like that over names like Tilray, I think make a lot of sense here

Ed Milewski:  So, Todd you mentioned Organigram and I looked at it earlier. Why all of a sudden and I mean I’ve been around this game for decades and I’m asking this kind of rhetorically but why all of a sudden today does this thing get a bid? Like, I mean it last few days have been pretty good. It’s up 50% in a week, isn’t it? Like almost?

Todd Harrison: Yeah, but it’s not alone. There are other names that have popped. I mean, but you’re also looking at the stock that’s down 50% in the last, you know since October, right? So it’s did it’s all relative. Right?  It’s up its up about a buck and a half but it was down about four or five dollars. So again, I think a lot of its tax selling moving out of the way and the tax loss harvesting moving out of the way.

I think Organigram, you know, the analysts who do cover the stock, you know, certainly look at it as one of the names that you know should be attractive based on their management, based on the biosynthetic, based on the brand, you know, but there’s a handful of names like that out there that we think are becoming more attractive obviously as a function of price and looking forward, you know, starting to nibble a little bit more on the Canadian side of the equation to supplement our U.S Holdings, Australian Holdings and our biotech holdings.

James West:   Great, Todd. Well, amazing contribution as usual. We really appreciate your insight. We’ll come back to you next week. Thanks for joining us today.

Todd Harrison: Yep. Thank you. Thank you. Happy New Year.

James West:   Happy New Year.

Ed Milewski:  Thanks, Todd.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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