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CB1 Capital Management CIO on Acquisition Growth Strategy in US Cannabis Space

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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 talks about what makes 1933 Industries Inc (CNSX:TGIF) (OTCMKTS:TGIFF) an important investment for CB1 Capital. Harrison discusses what he thinks the big stories will be in the cannabis space in 2019, including the possibility of banking reform in the United States. Harrison comments on the current acquisition growth strategy employed by many MSOs. He notes that while it is hard to extrapolate what brands will be successful, CB1 Capital is interested in management teams and companies with existing distribution footprints. Harrison discusses three phases of market moves (denial, migration, panic), suggesting that the cannabis space is still in denial, and believes that cannabis represents a longer tail secular bull market.

Transcript:

James West:   Everybody on our chat group has been asking us to ask you about TGIF, 1933 Industries.

Todd Harrison: Okay, sure. So you know, 1933 is a company that, you know, we own a big slug of stock, we’ve owned the stock for some time, largely because we think it’s real attractive. Their brands are great; CannaHemp, and certainly we think the stock is attractive, that’s why we own a lot of it. And then working with the company, we identified some synergies that would allow us to advise them and help them, through some strategic relationships, and certainly, you know, we couldn’t be happier. We’re big fans of the company, we’re big fans of the team, and so far, so good. It’s a good alliance for us, and we think it’s going to work out well for everybody.

James West:   Sure. So the team that launched 1933 Industries recently launched a company called Weekend Unlimited, which won the symbol POT. Are you invested n that company as well?

Todd Harrison: No, not right now. You know, 1933 is our vehicle, and certainly we’re working with them on a range of different initiatives right now. So it doesn’t preclude anything in the future, but you know, right now, that’s what it is.

James West:   Sure. 1933 Industries is focused primarily on US markets, correct?

Todd Harrison: Yeah. Their hemp brands are certainly focused on US markets; they have a pretty good operation in Nevada, which was actually what initially attracted us to them. You know, the Nevada market is pretty robust, and their brands are doing pretty well out there. So you know, one of the things that we look for at CB1, and we’ve been doing this for some time, now, is, because Wall Street doesn’t have a presence, you know, in the space yet, there’s a lot of inefficiencies, certainly, that exist that wouldn’t otherwise exist if Wall Street had a more ubiquitous presence, as we believe they will in the years to come, if not the months to come.

So certainly, we think that as Wall Street adopts, institutions do the work and run the numbers, a lot of these inefficiencies will self-correct over the course of, you know, let’s call it six months to a year.

James West:   Sure. Are you seeing more interest in the US companies that are trading on the CSE as we come to sort of like the end of Q1? I’ve seen a lot of sort of sideways trading in the US names that are trading on the CSE; why do you think that is?

Todd Harrison: Well, they’ve had pretty massive runs. I remember you and I were talking right at the beginning of the year, when, you know, when it felt like the world was falling apart, and we made the comment that, you know, last year it felt terrific entering the year, and it turned out to be a pretty terrible year for the space; and this year it felt pretty terrible coming in, and thus far it’s turned out to be a pretty good year in the last, you know, two months.

But certainly, you know, one of the things, James, you know, that we think about a lot – and I’ve been in the markets for 30 years – is really trying to identify asymmetrical risk. You know, asymmetrical risk/reward in the marketplace. And you know, as you look at the cannabis space and understanding, really, as a context that, you know, of the 700, 750 companies out there, most of them probably aren’t going to make it, right? But the ones that do are going to have pretty gyrational opportunities.

And you know, as we look at the asymmetric risk, you know, we like to frame it through the lens of four drivers, and that’s really time versus policy, right? We believe this is efficacious, we believe that, listen, you know, the endocannabinoid system, which helps to regulate neurotransmissions, wasn’t even discovered until 1992, and certainly the parallels between the plant and the person are widely unknown.

So all of that’s going to come through the clinical trials, that’s going to take time, but that presents an opportunity, as does the arbitrage of price, as we see it, particularly in the US names – the ability for banking reform to come through, which we do think is going to be a 2019 story. But that’s going to open up these companies to access debt financing, it’s going to allow a lot of the institutions to participate in the space and articulate that strategy through publicly traded securities.

And then finally the arbitrage of perception: it’s not about getting well, it’s about getting high; I don’t think we need to get into that, we’ve talked about that every time I’ve been on. And finally the arbitrage of liquidity, which is the fourth one. And you know, people look at the $300 billion cannabis global cash crop each year and say that’s the total addressable market; we like to look at cannabis and hemp as ingredients, and we think if you look at that and contemplate the optionality and all the end cases, the end products and use cases that we think this is going to build into, you know, we think this is a $1 trillion, $2 trillion market cap in a decade versus rough justice $100 billion now.

So again, you know, you look for asymmetrical risk in the marketplace, and we think we’re, you know, right there with cannabis and hemp.

James West:   That’s a cool approach. A lot of the companies in the US are basing their growth strategy on one of acquisition of premium opportunities in the cannabis production space and in the consumer packaged goods space. But the Federal prohibition kind of forces the US into a fractured sort of set of markets where it’s impossible for any one brand to sort of become clearly ascendant, like say a Victoria’s Secret would or a DKNY would.

So I’m wondering, is it – it must be one challenging piece of work to try to figure out which brands are going to be able to navigate that fractured marketplace while the Federal government, you know, moves. Obviously, it’s moving toward Federal de-prohibition; nobody can really say when that’s going to happen yet. But so, how do you sort of decide which companies are like the better bets for staying the long course, looking for that asymmetrical risk/reward return scenario?

Todd Harrison: Yeah, that’s a great question. You know, obviously it’s the artificial impediments to a natural business cycle that have created these asymmetric opportunities, and that comes with a cost, right? I mean, the cost is really the fractured market you talked about, the shenanigans of listing up in Canada for US operators and the like. You know, at this point, it’s a great point, it’s hard to extrapolate sort of what the brands are.

You know, we’re looking for things like, you know, management integrity, right? We put a high premium on the jockeys versus the horse, and really look for teams that we think have a pretty strong moral compass, but also have a good head on their shoulders with regard to the strategy. That’s one element.

Footprint is another; certainly we, you know, did our MSOs. You know, we have representation in most every state that this is either medically legal or recreationally or adult-use legal, and certainly in the states that are starting to flip on the Eastern Seabord. And then, you know, you have to make a bet on those.

You know, some companies, and Green Growth comes to mind, which we don’t own right now, but some companies are really approaching this, you know, which is very interesting, and saying, We have the distribution, now we’re going to backfill the brands into that. So that’s another strategy. But all in all, it’s really, it’s trying to work with what we have and piece together, you know, what we think are a pretty good portfolio of companies that have, you know, that have a good footprint, good management team, and have executed, right?

So now we’re entering the phase where the premium is going to be on execution, and I think that’s where we’re going to see a lot of these companies sort of delineate from one another.

James West:   Sure. Okay, so Todd, what kind of time horizon are you talking about in your sort of, like, in your mindset, in your strategic sort of approach? It strikes me that, from what I’m hearing, it’s like you’re taking like a three to five year look from where you’re going to start to harvest your investments. Is that more or less where you guys’ heads are at?

Todd Harrison: Yeah, you know, that sounds about right. Now, keep in mind: Wall Street has to adopt, institutions have to adapt, and again, when we talk about those arbitrages – time, price, perception and liquidity – there’s a process, right? The efficacy-driven solutions, that’s going to take time to come through the pipe. All part of the sort of the general awareness, and if you look at sort of the, you know, I’ve been trading for 30 years, and it’s my opinion that all market phases have, you know, all market moves have three phases: denial, migration and panic. And you know, I think we’re in the denial phase right now: Federally illegal, most people still think of Cheech and Chong as opposed to wellness.

I think that first cusp is coming, though. I think it’s going to be triggered by banking, and once institutions enter the fray, you’ll see a genuine migration, and then, you know, I think the current naysayers, and the people who really think this is the devil’s weed, they’ll turn buyer in 2022, 2023, when Goldman mixes the number one pick. And that’s probably where you want to make some sales.

But yeah, three to five years sounds about right, not to say that it’s not going to be opportunities with a shorter time horizon. You know, we have some trades, we have some investments, mostly investments, but certainly, you know, I think this is a longer-tail secular bull market.

We’ve been saying it for a couple of years: I still think we’re in the early stages.

James West:   You bet. All right, Todd, great input as usual. Really appreciate it. We’ll leave it there for now and come back to you in due course. Thanks for joining us on this Friday afternoon.

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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