Episode #133: Todd Harrison, CB1 Capital, “Humanity Has Had a 30,000 Year Relationship with Cannabis”
Guest: Todd Harrison is the Founding Partner and Chief Investment Officer at CB1 Capital. Before CB1, he spent almost three decades on Wall Street managing risk and researching financial market strategies. He was also the Founder and CEO of Emmy Award winning financial media company Minyanville Media, Inc.
Date Recorded: 11/30/18
Sponsor: Esters Wine Shop & Bar
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In Episode 133, we welcome Todd Harrison. Meb begins the conversation asking Todd about what got him into the cannabis space. Todd discusses his intellectual curiosity of the space, and what he has learned about the history of cannabis, from the 30,000 year relationship we have had with it as humans, to the US weaponizing marijuana.
Meb then leads into the topic of governments and states changing their attitudes. Todd talks about it being a confluence of things, but gets into a personal story of how he discovered the efficacious ability of cannabis by working with Dr. Julie Holland after struggling with a decade long treatment of PTSD with a Western medicine protocol.
The conversation then turns to the marketplace. Todd relays that there is quite a bit ahead for the consumer space. In hearing what scientists have to say, it has painted a much different picture for the breadth of wellness that is going to be disrupted going forward.
Next, Meb and Todd discuss a little background on cannabinoids in general. Todd describes that there are over 200 different cannabinoid strains that exist. CBD and THC are two that have been popularized, but when you drill down, there are far more, including CBN, that aids sleep.
The conversation shifts to the broad marketplace for investors. Todd describes the four primary arbitrage opportunities he sees that present opportunity: 1) Time Vs. Policy, 2) Price vs. Institutional Flow, 3) Perception, and 4) Liquidity.
Meb follows by asking Todd about the firm’s investment approach. Todd talks about taking the long view. He mentions that the space has had two drawdowns of 50% this year, and they count on disciplined position sizing and light use of puts to layer on with the long view but are using the current volatility to their advantage right now.
Meb then asks Todd about the leading countries in the global landscape right now. Todd talks about Canada being the most mature, Australia looking compelling, and sees the U.S. as having the best opportunity set.
Meb asks how Todd diversifies across industry groups and various verticals. Todd talks about there being about 500 listed stocks right now, and that there are probably 50 to 55 companies that his firm wants to invest in, and probably up to half of them at any given time. He thinks in 10 years’ time the survivors can offer a significant market cap. He and his team are focused on sticking with the companies they think are positioned to win.
Meb then asks what Todd’s favorite vertical is if he had to pick one to be invested in for 5 years. Todd mentions it would be biotech, even though it may take longer for those investments to pan out because they still have to go through the traditional biotech process.
Todd then gets into his approach for analyzing stocks. Todd discusses the importance of understanding the management teams, and “betting on jockeys as much as the horse,” as well as taking the fundamental perspective by getting a read on the company through a DCF analysis.
All this and more, including a few names in Todd’s portfolio, and some suggestions for resources investors can tap for research on the industry in Episode 133.
Links from the Episode:
- 0:50 – Welcome and introduction to the guest
- 1:53 – What led Todd into the cannabis space
- 4:23 – What is driving the change in attitude towards marijuana
- 7:58 – Overview of the space today
- 10:09 – Defining cannabinoids
- 12:35 – Arbitrage opportunities in this space
- 17:47 – CB1’s investment approach
- 19:57 – What global markets are in play
- 22:36 – Sponsor: Esters Wine Shop & Bar
- 23:47 – The different verticals to consider
- 26:08 – The changing population of consumption
- 27:45 – Favorite sub-industry
- 28:51 – How Todd analyzes companies in the space
- 33:37 – Gauging Todd’s interest in the private space
- 36:02 – Compelling names in the space
- 40:36 – Resources for researching the cannabis industry
- 41:25 – Morning Recap from CB1 Capital
- 41:46 – How writing has impacted Todd’s investing career
- 45:31 – Most memorable investment
- 48:14 – How to connect with Todd: @todd_harrison and Morning Recap from CB1 Capital
Transcript of Episode 133:
Meb: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Welcome Message: Meb Faber is the Co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Welcome, podcast listeners. Today, we have an awesome show for you. This is gonna be the first in a series of cannabis-focused investing podcasts. And when I went to Twitter, today’s guest is the unanimous answer when you guys said who is some of the best investors in the space. So, his background. He’s a founding partner, currently CIO, of CB1 Capital. Before that he spent numerous decades on Wall Street managing risk and trading for some of the top hedge funds on the street. He’s also spent a lot of time focused on education. He’s an author. He has even won an Emmy. So I would love to introduce him. A warm welcome to the show. Todd Harrison.
Todd: Thank you for having me.
Meb: Yeah, Todd, it’s gonna be a lot of fun today. So you’re chatting from New York. We’re here in LA. And I mentioned in the intro you’re the unanimous answer of the guy to talk to in cannabis investing. And this has been a topic that’s been, I think, a lot of fun and in the news. And we’ll dive into all different areas. But given your background on Wall Street and education, what led you to the cannabis space? I would love to hear a little bit about what kind of brought you to this space and decided that, hey, this is a good opportunity for the next 10, 20 years.
Todd: Yeah, sure. So I was out there, I think in 2010, 2012. I think it was “Yahoo Finance,” talking about how this was probably my best investment theme for the next decade. It was a little early, but certainly, also, I was wrong in sort of my assumptions in that what I was looking at, namely the tax revenue, job growth, crime rate, prison population, all of the societal benefits that would emerge from this, it really was lost on me at first to sort of what the genesis of what this is.
And we always talk about this space really being a rabbit hole for the intellectually curious. And for me, having been down this road, I’ll tell you, what I found is that humanity’s had a 30,000-year relationship with cannabis. It’s been mostly through the lens of health and wellness. And certainly, the American Medical Association agreed, having suggested this for a number of different indications at the turn of the century.
What ended up happening is the U.S. government weaponized marijuana. There was an immigration problem at the Texas border in El Paso after the Mexican Revolution. The immigrants were flooding the border. And the government needed a way to halt that. They outlawed marijuana, right? The American Medical Association didn’t know what marijuana was. They were already prescribing cannabis. So this was a bit of a ruse that’s continued for the last 90 years. But very much, as we say, a pimple on an elephant’s ass in the context of history’s relationship with cannabis.
Meb: It’s funny. My father grew up on a farm in Nebraska. And I remember as a kid driving around. And he would point out some wild growing marijuana and tell me what it is. And I just remember, this, like for all the propaganda from growing up as a child in the 80s of your brain on drugs and everything else. And I remember seeing it and being like struck with fear almost of like, “Oh my god, like someone’s… That’s like a crazy drug dealer growing that,” or you know, like we, “Can’t even be near it. We’re gonna get into trouble.”
And it’s funny how ingrained a lot of that message was from the media. So times have changed a bit. We live in a world where a lot of countries and governments and states are changing their perception around cannabis. Maybe walk us a little bit toward modern times. So you had cannabis being scheduled as a narcotic not that long ago, a controlled substance scheduled under narcotic. What do you see is the evolution, the developing reason, for the change in attitudes? Has it been the internet? Has it been some scientific studies? What’s driven the societal change?
Todd: Well, it’s been a confluence of things. And you touched on two of them. Certainly, the efficacy side of the equation and, you know, my personal history with this plant. And, you know, I’ll tell you from experience, I was down there in lower Manhattan for 9/11, saw a number of grisly things, people holding hands and jumping from the towers, and the plane hitting, and the smoke and all that. And I’ll tell you, Meb, I didn’t even know what PTSD was for a good decade. I just knew that I was very moody and out of sorts and not myself.
And I had the foresight to go to a doctor and really try to get ahead of it, knowing that the damage would be profound. And initially, we went on this Western medicine protocol of just a number of different antidepressants, and pills for sleep, and pills for this, and pills for that. You know, I call it the sort of the lost decade, you know. For me, just an out of body experience and trying to cope with a lot of things. I found through a doctor by the name of Dr. Julie Holland, who has also been on the CNN specials that have helped to pivot Sanjay Gupta, towards understanding the true nature of cannabis and the efficacy-driven solutions.
But she really, you know, saved my life in a lot of ways. She opened the door to the science for me, and like I said, this rabbit hole of intellectual curiosity as I started to go down it. And we started to really talk to a lot of the scientists. It’s fascinating stuff, man. We have an endocannabinoid system in our body. And it regulates neurotransmissions. It’s pretty integral in terms of our well-being, in terms of promoting homeostasis.
And this whole system wasn’t discovered by Western medicine until the 1980s, late 80s, early 90s, actually. So we’re talking, you know, rough justice, you know, 30 some odd years that they’ve known what this is. But the scientists who we spoke with really painted this picture of how over the last 100 years, we’ve gone from hunters and gatherers to desk jobs. And we’ve gone from eating organic foods to processed foods and transfats and chemicals.
And certainly, heredity and lifestyle play a role, a large role. But as we get older, the tone of our endocannabinoid system changes. Our body’s ability to regulate neurotransmissions changes. And their belief system is that this really has been a part and parcel to a lot of the pernicious and unmet medical conditions that have ravaged society over the last 75, 80 years. And I’m not talking about things like anxiety, stress, appetite, nausea, the things that you might think of when you think of cannabis as a potential wellness solution. But as you probably know, the FDA just approved a purified form of CBD to treat childhood onset, epileptic disorders, Epidiolex, which is a GW Pharmaceuticals company, excuse me, a drug that is reducing seizures in children, right?
And if you understand the science and sort of how this works, and that the cannabinoids found in cannabis are identical in action to the endocannabinoid that our body naturally produces, you start to really understand that this is not necessarily a one-hit wonder in the field of efficacy. But certainly, as we say out here, has this efficacious agility that can really address a lot of these unmet medical conditions from epilepsy to things like autism, and things like cancer, and Alzheimer’s, and traumatic brain injuries and things like PTSD. So to understand the scientists who really understand that we’re really at the forefront of some really just amazing developments in the fields of wellness and health and wellness.
Meb: For our listeners who may not be as familiar with this world, maybe help us lay down the foundation and give us a broad overview of what we mean when we’re talking about the cannabis space because I think a lot of listeners probably hear the words marijuana, hemp, cannabis. And they don’t know what any of them mean. And then also, maybe talk a little bit about the marketplace.
Todd: Yeah, in terms of framing cannabis in the marketplace, we really look at the market and say “Okay, there’s these two distinct worlds that are going to evolve here, bifurcation, if you will.” On the one side the consumer space, right, the beverages, the nutraceuticals, the consumer packaged goods, right? You’re not gonna smoke cannabis in 2.0 and my opinion. You’re gonna eat it. You’re gonna drink it. You’re gonna rub it on. You’re gonna take bubble baths in it. It’s really quite good for you.
And I think as society starts to understand that this isn’t something that’s about getting high, per se, but more about getting well and the wellness benefits and how cannabinoids are anti-inflammatories, and only about 10% of cannabinoids, you’re going to produce that feeling of euphoria or that feeling of getting high, we think that really the consumer tail on this is quite significant, right? And that’s on the one side, right? And we think the market is starting to understand that. But where we think the market’s really sort of caught in the past is in this notion of efficacy driven solutions, right, wellness.
The more traditional biotech pathway where you’re gonna go through these clinical trials for indications that are ranging from brain cancer to Alzheimer’s to just a number of different solutions, that we think are really gonna blow people’s minds because we’re not talking about drugs that mask the symptoms here. We’re talking about addressing the underlying condition that’s causing these conditions.
And we’ve talked about this to doctors, and biotech CEOs, and cardiothoracic surgeons. And they looked at us like we have four heads. They don’t understand. You don’t know what you don’t know. But when we talked to the scientists who have been studying the parallels between the cannabinoids found in cannabis, and the endocannabinoid that our body naturally produces, it paints a much different picture in terms of just the breadth of wellness that’s gonna be disrupted going forward. It’s pretty amazing stuff.
Meb: And maybe give us a little more of a description of cannabinoids in general. I know most of the listeners probably have heard of the phrases THC or CBD. But maybe give us a kind of a broad overview of what some of these terms mean as far as in implications, as far as products, and what might develop from these plants.
Todd: Sure. So I mean, the way to look at it and the way that we sort of described it is for the last however many centuries, we’ve thrown a lot of spaghetti against the wall because we know that the end of the day, whatever sticks is a net therapeutic. And it’s always been a different experience because from experience to experience the cannabis is changing. And we each have different reactions to it and there’s different strains. Sometimes it can make you feel up. Sometimes it can make you feel down, anxious or depressed, whatever the case may be.
I always talk about how that sort of akin to walk into a bar and just picking a bottle, any bottle, make it the Grenadine and saying, “Well, I don’t like alcohol, right?” There’s a lot of different parts to the cannabis plant. But as you start to drill down and understand you know about CBD, right? That seems to be all the rage, and it’s not producing the high, but it’s an anti-psychotic. It’s really helping the body. And then THC gets a bad rap that’s producing the high, but also quite therapeutic.
But those are two of what we’ve been told is upwards of 200 different cannabinoids that are known or at least that are thought to be in existence. Things like CBN, which will not get you high, but will help you sleep without the side effects, right, is pretty significant. Things like THCV, which will get you high, but is an appetite suppressant, right, so it’ll help you to not eat. All of these are unique in properties. And all of them are therapeutic in their own way.
What’s pretty amazing, from a wellness standpoint, is the notion of using your endocannabinoid system, which is the most ubiquitous network of receptors in the human body, and using that as a retrograde pathway to wellness. And what I mean by that is being able to target receptors in specific areas of your body with specific cannabinoids to produce efficacious results. That’s where the science is going.
And it’s really amazing to us as we sort of watch this conversation progress throughout society that, you know, people are still falling back on the, you know, Cheech and Chong analogies and thinking that this is really a gateway drug when in reality, you have 25% less deaths from opioid-related situations in cannabis-friendly states.
Meb: That was a great overview. Let’s start to think a little bit about the broad marketplace. And as an investor, we can talk a little bit about investing in this world. And in many ways, it’s truly… Despite having been around for centuries you know, the space in many ways is a really emerging industry and a great opportunity in various verticals. You shared some slides with us that kind of showed a few arbitrage opportunities or concepts as the landscape evolves. Maybe you can lay out some of those ideas as what you meant when you were talking about arbitrage opportunities in this world.
Todd: Well, we think there’s four primary arbitrages that we often speak of. The first one is an arbitrage of time versus policy. We do believe this is efficacious. We do believe that it is medicine in the legitimate sense. And we do believe that over the course of the next decade, this is gonna migrate from drugs from state dispensaries to medicines prescribed by doctors covered by insurance. A more traditional pathway.
And certainly, again, there’s gonna be two markets right? There’s gonna be that recreational/consumer market, where we really do foresee just a tremendous tale. And remember, again, we’re looking at cannabis as an ingredient. So we’re not looking at the flower as the end product, but rather the flower as an ingredient in just an array of use cases in end products. So if there’s about 300 billion of cannabis flower estimated in the world each year in terms of the cash crop, then we look at that 300 billion as an ingredient rather than the end product.
I think the optionality that you introduce to that will evolve into something akin to a $2 to $3 trillion industry in terms of market caps a decade from now, right? There’s about $50 billion of equities right now in the world, right? So just to give you a sense of the scale that we foresee coming. But on the other side of the equation, again, is going to be this notion of biotech cannabis. And we think that’s really gonna be the next phase that’s going to start to evolve companies like GW Pharma, companies like Corvus. There’s a handful of them in Israel.
We think that the science is really gonna drive this conversation forward. And we think ultimately, that’s going to push this conversation to a more traditional wellness and medicine arena over the next decade. So in terms of the arbitrage of time, that’s what we see happening. The arbitrage or price is probably more compelling. It’s one of the reasons why we’re so overweight U.S. operators in Australia and operators for that matter, and less so Canada, in that we see the front end of demand in front of us with the institutions climbing into the U.S. marketplace.
The president of BlackRock was out a couple weeks ago saying, “We’re invested in cannabis. We just can’t find anybody to clear our trades for us.” So the custody issues are certainly the last thing to fall, in our opinion. We do think we see banking reform in the first half of 2019. Don’t presume to know when the markets will start to price that in. But certainly, as we look out across the landscape, and there are a lot of these U.S. operators that are coming to market right now, we think there’s pretty significant growth in front of us in the ‘FANGification,’ if you will, of U.S. cannabis, right? It’s gonna be a massive U.S. market. Institutions are gonna buy. And what they don’t buy we think Canada is going to turn buyer. So we think there’s a lot of demand ahead of us in the space on the U.S. side.
The biggest arbitrage, the third arbitrage, is one of perception, getting well versed getting high. We actually trademarked, “It’s not about getting high. It’s about getting well,” because we think that’s exactly right. Most people think that this is a bad thing. We’ve actually had investors tell us it’s against their religion to invest with us. We try to communicate that in the context of the last 30,000 years, there hasn’t been a religion that hasn’t relied on cannabis as God’s medicine across a number of different indications.
But certainly, that persists. We see sort of these people who are hell-bent against us right now being the late stage buyers, if you will. If you believe that every market migrates through three phases of denial, migration, and panic, we think that as the story really gets told in the marketplace, Wall Street starts to cover these stocks for what they are in terms of health and wellness, we think that the investment community is really gonna turn buyer. And that’s gonna be a five to seven-year tale.
And the last arbitrage for us is liquidity in that we are structured as a fund and as an emerging wellness fund, a health care fund, not from a standpoint of optics, but from the standpoint that we genuinely believe this is impact investing, and that this is going to help improve and save a lot of lives. And from a strategy standpoint, the ability to look out across the world, and look at what we now have, about 30 positions across the U.S., Canada, Australia, Europe, South America, and biotech, and find what we think are gonna be the winners in this new world as institutions come online and start to do the work.
You know, I will say this because it’s important. It’s a very volatile space because it’s in retail hands right now. And retail holders are just tremendously emotional. And we’re seeing, you know, a lot of these stocks move monolithically 40, 50% in eclipse in one direction. Obviously, as Wall Street steps in, does the work, we think these stocks are gonna find themselves in pharma hands by this time next year.
Meb: So talk to me a little bit about you all’s approach. So you’re structured as a traditional private fund. And I assume the main focus is in public markets. It sounds like it’s global. How many names do you guys own? Is it meant to be you’re holding these guys for a time frame of a year, three years, a week? Given your trading background, is it a little bit more tactical? Is it long, short? How do you think about investing in this space?
Todd: Sure. So we’re playing long ball, especially with a lot of these U.S. names that are coming to market right now. I mean, there are risks to this space. And I think you’ve probably seen me post a Bitcoin verse cannabis chart over the last year and a half, and it’s almost took for tech for tech. You know, the risk to this space and what Bitcoin also has and what the .com space also as or had I should say, Y2K the bubble and bust, is you got that duration risk, right? Everything they said the.com and technology space would be proved true, but not without a tremendous technology crash first.
And certainly, that’s within the probability spectrum going forward for cannabis and for Bitcoin. I think we’re seeing it. But certainly, you know, cannabis, with my names, I’ve had two 50% down drafts so far this year. And it’s just the nature of the beast when you’re trading on the frontier. So what we’re looking to do is really try to look through the near-term smoke. We establish a target percentage of our book for each position, anywhere from half a percent for some of the smaller biotechs upward of call it 5 or 6% with a cap at rough justice 10%, if there’s a situation. But, you know, using opportunity, using the volatility, is to our advantage or trying to.
So if we have a 3% position in a stock that is trading at 5 and the stock trades at two and a half, we’re gonna have to double down in that position to maintain our 3% position. And then if it rallies we’ll take some off. But we’ll keep the core. And that’s what we’re trying to manage as we move forward. And at any given time, we’ll take 1 to 5% of our assets and non-correlated put strategies on the market to help buffer the downside. But to do that, to buffer not to pair, right. We’re not a short tech fund, or short spy fund. We’re looking to capture the next 5 to 10 years in what we think are gonna be the winners in the space as they emerge.
Meb: Two follow-up questions. One is talk to me a little bit about global investment landscape. I mean, what’s your opportunity set? Is it 50 names? Is it 500 names? And what are really the leading countries? I imagine Canada was probably out of the gate, the biggest one. But I imagine the U.S. is quickly becoming a big player there. And you mentioned a few other locales. What does it look like globally as far as development of the opportunity set?
Todd: So Canada is clearly the most mature. And certainly, as we watch, you know, the capital flows, you know, there’s been a disproportionate amount of attention on the Tilrays, Canopies, and Cronos’ of the world because they’re listed on U.S. exchanges and you can get the retail audiences in there. But by and large, you know, a lot of the Canadian companies are foreign, literally and figuratively, foreign to U.S. investors. And there’s some real good companies up there that we think are undervalued. But again, until you have some research analyst in there doing the work and helping to advise institutions, I think those sorts of inefficiencies are gonna continue to continue.
But Canada is the most mature. The U.S. we think is probably the best opportunity over the next year in that, again, the end products is where the money is gonna be made here. Looking at cannabis and hemp as ingredients, the margins are gonna get much better over time as the price of cannabis sells off. This gets lost on a lot of people who think that lower prices in cannabis is a death melt for the industry. It’s actually a creative to margins for the companies that are using cannabis as an input cost.
Certainly, the U.S. we think is gonna be just a number of magnitudes larger than Canada, although we do see Canada entering the U.S. as soon as banking reform comes through. They’ll use their paper as currency, as they should, for creative deals to help justify valuations because that’s what they gotta do. So the U.S. is gonna be big. But we think Australia is very compelling, if you have the patience, you know. You have a lot of these names in Australia are down 50, 60% from their earlier levels this year. But again, if you size your positions the right way, I think you have an opportunity to buy some real market leaders in Australia for a couple hundred million dollar market caps that I think has the potential to turn into $ billion, 2 $3 billion companies over the next couple years.
So trying to manage the duration risk across the different continents, and also marry the verticals and get a nice mix of exposure between some of the U.S. dispensaries and cultivations, the MSOs, right, the multi-state operators, the laboratory space, we think is gonna be a pretty unique picks and shovels play for cannabis. Australia, and then a number of CBD brands that we think are just gonna take off like wildfire on the other side of the Farm Bill.
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Meb: Talk to me about the various verticals and sectors. I mean, you mentioned a little bit about a few of the different areas, whether it’s biotech, whether it’s the actual growers and extractors. How do you think about diversifying these groups as part of the ecosystem because there’s a dozen different areas, theoretically, you could chop this up into. I laugh because, you know, I’ve seen some of these funds that will pitch being kind of tangential to marijuana. And they talk about, “Oh, well, here’s all these companies that, you know, do stuff related to this space.” But what are kind of the main sub-sectors of the cannabis space that you think are kind of integral to including in a portfolio? And how do you think about balancing the holdings across them?
Todd: Like I said, the consumer side of the equation, you’re looking at a lot of these companies/ And it’s no different than during Y2K, looking at Friendster, and Facebook, and MySpace and saying, “Okay, well, you know, one of these is gonna win and two of these are gonna die, right?” There’s about probably about 500 companies that are listed that are tangentially cannabis. We think there’s about 50, 55 companies that are actually real companies that we wanna invest in, of which we’ll own half of them in any given time, left justice.
But there’s a lot of walking zombies out there. In the same way in Y2K, you know, you had the pets.coms, and a number of different companies that were in the right place at the right time, but didn’t have the management that was gonna execute. There’s gonna be a war of attrition for a lot of these players. But the ones that can survive, and the ones that can execute against plan, you’re talking for all of these U.S. operators right now that everybody’s wringing their hands because their market cap is $2 to $3 billion. And they’re having tough first quarters before this is even online, before it’s even federally legal.
We think 10 years’ time, we’re gonna have a handful of hundred billion dollar market caps. We think in five years, you know, by 2020, even you can see five baggers in the winners here in the U.S. side. So it’s really just trying to sync your time horizon and your risk profile and stick with the companies that you think are positioned to win. And understand that a lot of these companies aren’t gonna be around. It’s just the way it’s going to be. But as we look forward, I will tell you we bucket our catalysts into three different lenses on the state level, on the federal level, and on the international level. And we can point to catalysts in all three buckets right now that that suggests that there’s gonna be a much better environment for cannabis in 2019.
Meb: It’s fun to kinda look around. And you know, the use case population for the end user is expanded so much where I mean, I’m talking to family members and friends that now use CBD oil to sleep that never in 1,000 years would have ever considered using any sort of marijuana product. I know people that use it with their animals, for example. And it’s interesting to see it sort of developed and the mood changed relative to where it’s been historically with sentiment. And that’s a interesting part about the investing landscape.
Todd: To that end, I’ll tell you, I’ve been trading 30 years. I always frame trading as a process of capturing the disconnect between perception and reality. I look at the cannabis space and every day I come in here, and I shake my head. People don’t understand, even… We talk to the analysts in GW Pharmaceuticals. They don’t even understand the mechanism of action. They don’t understand the science because you don’t know what you don’t know. And Western medicine has been informing the stock market.
But you know, you touched on it. Vet supplements, cosmetics and vanity is gonna be massive. Like, we genuinely believe that there’s going to be a lotion that you can put on, that’s gonna help remove wrinkles. And I don’t know what it’s like in Los Angeles. But here on the North Shore of Long Island, that’s gonna sell, and it’s gonna sell really, really well. So these consumer tales… And I think what people are gonna really be surprised by it’s just how ubiquitous this is across society. I don’t see an industry this isn’t going to disrupt, to be honest with you, because the entire world has to come back online after an artificial impediment that served the natural business cycle for the last 90 years.
Meb: So if you had to pick one of the verticals, and I’m not gonna hold you to this, but if you said, “All right, I gotta pick one of the verticals for five years,” which would be your favorite sub-industry? Would it be the biopharma? Would it be the growing and extraction? What would be… if you had to say, “I’m just gonna invest in one,” what do you think has the most potential?
Todd: I think the greatest offsides is on the biotech side personally. It’s just gonna take longer to play through because it has to go through a traditional biotech process. And until you have that process behind us, most of Western medicine is just not even going to pay it in mind. I do think that the U.S. multi-state operators are going to be a pretty terrific investment over the next five years. And again, when we look at the revenue growth, if you price these things on 2018 revenue, you sort of shake your head and go, “What’s it all about?”
You price it on 2019 revenues, you start to get excited. But if you can look through 2020 revenue, you realize that these things are real cheap. And when institutions come in, if you can figure out which ones they’re gonna come into, I think you’re gonna have some pretty good tailwinds going through next year.
Meb: You know, that’s an interesting point because I went to the big cannabis convention in Las Vegas a few weeks ago, and you know, I’m just trying to… I’m a quant. So everything I do is quant-based. But I like to be educated and kind of keep my fingers and toes on the pulse of what’s going on in some fun areas. And so I went to this conference. And there must have been 20,000 people there. And it feels like a gold rush, in many ways. And a lot of these companies are obviously private in all parts of the ecosystem.
But I was laughing at… three sentiment points I’ll make about this conference. The first was I was at the Institutional Investor Day. And I was sitting at a table and I was laughing because the table to my left was drinking beers. And the table to my right… And this is like 1 p.m. The table to my right was vaping. So I’ve never been to any other Institutional Investment Conference where people were drinking beers at 1 p.m. And second was one of the presenters stood up and he said… he was kind of riffing on a topic…
You mentioned in a slightly different way where he where he was talking about, you know, some of these large providers, he says, “You just can’t value these companies currently on revenues.” And I said, “Oh boy, that likens back to the late 90s.” You know, some of the people would just buy at any price sort of concept. So when you’re in an environment like we are where you mentioned these stocks can move 50%, no sweat, entire industries can move 50%. there’s a lot of uninformed money washing around in an and out retail pro everything alike, how do you approach analyzing these companies? Is it straight up, hey, old school discounted cash flow for 10 years works? Is it some other concepts and ideas? How do you think about picking out the good guys from the expensive stocks to avoid?
Todd: Given that there’s no Wall Street research, I mean, there’s very little, so you have Canaccord, you have GMP, you have a handful, Gate Capital, a few others, PI, doing the work up in Canada. But certainly, the Morgans, and the Goldmans, and the Bank of Americas of the world are circling, right. I mean, we’ve been to enough conferences and we spoken to enough analysts that we know that the coverage is coming, right? Investors are demanding it. And if Wall Street is gonna do anything, it’s gonna follow the money, right?
It just needs banking to get on board. And we think that happens again in the first half of next year. But in terms of looking at the companies now, I mean, really, you’re betting on the jockeys as much as the horse. You’re looking for management that has some integrity, that has some operating history. But you’re also looking at things like footprint. On this side of the business, you can do a traditional DCF out to next year 2020 and I think a pretty good idea of how to eyeball these things.
But again, I think the duration of the risk, the soft underbelly of exposure, that we have right now is that these things take time, right? And we’ve been writing about this on Twitter you know, for the last month saying, “Don’t expect… You know, if you’re buying new socks for the first quarter, or even the first year, you may be real disappointed because these numbers aren’t going to be impressive. There’s a lot of bumps and bruises and a lot of detours going on because it’s such a fragmented space with so many different crosscurrents going on that, of course, there’s going to be some bumps and bruises as they come online.”
But the bull case for this space is really just watching this revenue come online next year. And I think next year you’ll see billions, billions of dollars in revenue in this space, which is not something that I think you had that immediate gratification, if you can call it that, in Y2K because you know, I’ve been trading 30 years/ And I see the warning signs also. But I don’t think that cannabis is Bitcoin for a few reasons, one of which is the history right, the 30,000-year relationship with society, and the existing global demand that we’ve spoken about.
Number two, you don’t have billions of dollars of revenue coming online next year. And number three, Bitcoin for all its benefits that so many people can speak to better than I can, it’s not efficacious. It’s not gonna help disrupt Western medicine across a number of different indications while the side effect profiles just need to be demonstrably better. And we talked about this a lot. You know, there are people on right that think this is the devil’s weed.
There are people on the left that wanna smoke a vaporizer or joint on a Saturday night. But all of us, if somebody that we love is suffering, you know, we want the best medicine with the least amount of side effects full stop every time. And that’s the value proposition in cannabis that most people are just not looking at because they’ve been programmed to believe that this is something that’s bad for us.
Meb: Well said. And I’d add a fourth caveat to how it’s different from the crypto space. In the cannabis space, you actually have products that produce a lot of cash flows and in some cases a ton of cash flows and in actual businesses that are functional and interesting. Do you think at all about… as you grow your business and focus on the fund, is there ever a time where have you considered moving into the private space at all? And the thinking being that there’s a number of younger companies that are approaching the cannabis space that, you know, might be too small or just not developed enough for the public markets? Is that something you would ever consider expanding into at any point in the future?
Todd: We have some privates. They’re mostly bridges and discounted bridges to market where, you know, you could get a pretty good discount by being there a month or two early. But we want the benefits of the public market for reasons that will become obvious after institutions start to adopt the space. I mean, we see RIAs allocating 2 to 5% of book as a a growth hedge to this space within five years, right? And this is going to be the model. There will always be a private equity model just as well as there’s always been private equity.
But for our bang for the buck, to allow the listing protocol to act as the first layer of due diligence and then position ourselves in front of the institutions that are going to chase growth because that’s what institutions do, you know, we think that there is a forward model that has yet to really take root for obvious reasons, right, because it’s illegal, because you can’t get banking, because most U.S. investors still can’t buy these stocks. And if they could, they wouldn’t know what to buy. So this all has to come online through Wall Street. And that’s all gonna manifest primarily through public markets. But, you know, to your point yes, there’s some great companies out there and some of them we’re invested at a private level.
Meb: As an ETF issuer, we had filed for a cannabis fund years ago. And it’s funny because we don’t do thematics. You know, my criteria for launching funds is it has to be something that I wanna invest my own money into. You know, I put 100% of my public assets into our funds and strategies. And so historically thematic sort of areas hasn’t checked that box for me. But this is an interesting one because it’s an area that, to, me is you have an opportunity where… I think you’re in a really good spot because a lot of these market cap-weighted indexes, which work in general for sectors and entire countries and global markets, I think it’s a really bad idea to simply market cap weight a cannabis portfolio or a lot of thematics in their early days.
And the Tilray example I think is pretty good reason why, where you have just so much money sloshing around that has nothing to do with fundamentals. I thought it would be fun, to the extent you’re open to it, maybe outlining a few names that you think are particularly interesting and in various parts of the cannabis ecosystem would love to hear, you know, even as jumping off points to talk about things they’re developing or ideas that you think are interesting for investors, as well.
Todd: Sure. I mean, I guess we could jump off with the Farm Bill because that seems to be near-term business. You know, there’s a few names that we look at as sort of being proxies where there’s an understanding. Again, you know, there’s a lot of fast money in the space that is looking to sell news of the Farm Bill, you know, whereas we sort of take the approach that this is transformational in terms of distribution, in terms of the corporate relationships that are gonna take place.
Meb: Can you explain what you mean by the Farm Bill to the listeners that may not be familiar?
Todd: Sure. So Mitch McConnell’s including basically legalizing hemp, which is cannabis’ cousin that doesn’t have or has very little THC in it. Hemp is a very agile crop. You can make everything from medicines to clothing to building materials to plastic composites. You name it, right? The list goes on. And so we’re already the world’s biggest cash crop. So it speaks to the utility of this, given its still illegal in the U.S.
But CBD certainly, people increasingly are becoming aware of the therapeutic benefits of CBD. It’s a non-psycho or I should say, non-euphoric cousin of THC. And that’s going to be, you know, really pushed through the consumer lens. And you’re not gonna see CBD, by the way, because of, again, the bifurcation between the medical side and the consumer side. It’ll be called full spectrum hemp oil, I guess in the U.S. market, or that’s what I believe it will be called. But you’ll see things like Charlotte’s Web, Elixinol, Phivida. These are all companies we think… Elixinol, it’s an Australian company, EXL in Australia. We think that that’s one of the best-positioned CBD brands out there. And Phivida, VIDA, is another one.
It’s been left for dead because they’re not online yet. But this is the ex-Red Bull candidate management team. They’ve got distribution through channels that include Whole Foods. And again, a lot of these revenues haven’t come online, so people don’t know where these stocks are. But with Wall Street comes awareness. And with awareness comes institutional support. And I think that’s all in front of us. So those are some names on the CBD side that we like.
In terms of the biotech side, you know, GW was just gotten beaten like a chicken cutlet since it got approved for Epidiolex in October. The stock was 180. The stock is now at 123. We don’t even own GW for Epidiolex, although it’s a terrific medicine. We own this because we think that you’re getting the pipe for free. There’s a brain cancer phase two trials that were released in February of 2017. They couldn’t release secondary endpoints, which is overall survival, because, “Too many people were still surviving.” It’s now almost December of 2018. They still haven’t released the secondary endpoints.
Meanwhile, the new chief medical officer, did his doctoral thesis in glioblastoma, in brain cancer. So, again, we don’t think that the market understands candidates. And we think GW sort of encapsulates that dynamic. And we’ve been wrong to the last two months. But again, these things take some time. Core Business is another name, biotech wise, that we think is misunderstood. There’s a stock that’s trading hands around $6.50, $7. But meanwhile, it’s got five or six analysts that cover it. Average price target is $23, huge short interest 20 something percent. And we just think that the market doesn’t understand the science behind what goes on for cannabinoid wellness. So those are two sectors.
In terms of the U.S. operators, I think they’re all… you know, there’s a handful, iAnthus we think is best in breed. They’re merging with MPX Bioceutical. We have a handful of others like Green Thumb. But you know, a lot of these names are just now coming to market, whether that’s acreage or Curaleaf for harvest or Cresco. Again, we think there’s about 10 names that are gonna be in the race for ‘FANGification’ of U.S. cannabis operators. That’s a race to $100 billion market cap in eight to 10 years in our opinion, and they’re all gonna be fighting it out.
So we look at those names as all being in that race. And certainly as institutions come online, we think those are going to be where they go to gain exposure. And then, you know, we talked a little bit about Australia, Elixinol. AusCann, and Cann Group I think are the two best in breeds down there. Canopy and Aurora both on a chunk of them respectively. And we just think that that’s lagging the global trade into cannabis.
Meb: That’s interesting. That’s helpful. You know, I was thinking as you were talking, you mentioned, like, with a lot of developing industries and particularly small micro caps, there’s a lack of research, particularly with investment banks, etc. As an investor who is listening to this podcast, and says, “Okay, I wanna get educated on the space. I really wanna find some good research, whatever,” what are the best resources out there? Are there any that particularly, whether it’s websites, banks, research analyst, books, anything that investors may go to learn a little more and get up to speed?
Todd: Well, you know, Twitter is a great resource, if you can sort of sift through the noise to get to the news. Alan Brochstein does great work. He’s invest420 on Twitter. And Tommy Angel does great work from a policy standpoint and a news standpoint. CB1 Capital, my firm, puts out a morning recap. And we can recap of all the news in the space. It’s free you can sign up at our website. And in terms of the banks, you know, certainly Canaccord, GMP, Cowen, covers the space, and you’re gonna see a lot more. I mean, listen. If the tenor of the incoming phone calls that we’re getting from around the street is any indication, there’s gonna be a lot of research analysts that are initiating coverage in cannabis over the next few months.
Meb: You know, talk to me a little bit about that because I was smiling. You know, as someone who has also been pretty transparent and a writer for a while, you predate me across numerous properties going way back to thestreet.com I think even in the late 90s, early 2000s. You mentioned Twitter, and I saw a tweet you’d had recently. And you’re like, “Hey, look, what’s your best cannabis investing idea?” I think you must have gotten 100 responses to it.
Talk to me a little bit about the transparent writing process. You know, is that something that you think has been pretty useful? Is it something that’s been kind of fun as far as the investment process, you know, because the world’s changed a lot over the last 20 years. I think 20 years ago we might have been talking about Raging Bull or the Yahoo or Motley Fool message boards. But now it’s probably Twitter. Any thoughts there?
Todd: I’ve been writing in real time… Yeah, I’ve been sharing my investment trading process in real time since spring of 2000, actually July of 2000 when Jim Cramer, who was my partner at the time, went on vacation and asked me to fill in for thestreet.com. And I didn’t wanna do it, to be honest, at first, but did so as a favor. And I’m, you know, really indebted to Jim for opening that door because it’s really allowed me the opportunity to synthesize my thoughts out loud for all these years. And, you know, it certainly has been a bit of an arc when I struck out after 9/11… struck out is an odd choice of words.
When I set out after 9/11 with Minyanville, it was really an effort to give back. You know, when I was writing at The Street to Y2K, my grandfather was failing, as the case may be. And I eventually shared that news and the hundreds if not thousands of letters, that people… emails that would reach my grandfather in his deathbed. And this was back in, you know, Y2K. And it just sort of sold me on the idea that there’s, you know, a lot of good people out there that are just able to connect to this new medium called the World Wide Interweb. That was a long time ago.
I started my business really predicated on sort of driving… you know, after 9/11 wanting to sort of search out that social utility and give back. I started Children’s Foundation. But somebody once said to me, “Don’t let your passion become your plight.” And, you know, as I started to have to write every day and then went from a trader that writes to a writer that trades. And it just changed. You know, having to think of something intelligent or pseudo-intelligent to write all day every day for… as it turned out for the next 15 years, I certainly burned out. So after that, I took a bit of a breather from sharing my thoughts online.
But as I got back into this space, what I found, honestly, is there’s just so much misinformation, and so many hucksters out there trying to sell a bill of goods to people that may not know better. Certainly, framing this discussion as advice as opposed to wellness play, we just decided that we’re gonna do our part to frame the conversation for what this is and sort of tell the truth about what this is. And the reaction online on Twitter, I mean, I joke about it ,but made a lot of good friends, people who are real good people who just are trying to figure this out like the rest of us.
And so you build that community sort of whether, you could say it’s thestreet.com community or it was them Minyanville community, or now it’s the CB1 community, Twitter, and that medium allows that to sort of reinvent itself. And I know that it’s sort opened my eyes to a lot of information that I wouldn’t have already known or haven’t already seen.
Meb: Well, you know, it’s funny. You get the beauty, and the drawback of the internet, of course, and Twitter as it gives you a soapbox and there’s no quicker feedback mechanism. And then the internet, if you come up with an idea or put something out there, you’re gonna hear pretty quickly if it’s really stupid, or if it’s brilliant, or whatever. For every troll, there’s 100 wonderful people. And I certainly echo your thoughts that… And the podcast as an extension, I really met a lot of wonderful people throughout the years.
As we start winding down, Todd, our question of the year for 2018, which you may be the last person we ask this as we get near the end of the year. We gotta come up with a new question for 2019. I haven’t thought of one yet. But our 2017 question was name something beautiful or magical, an idea that no one has ever heard of. But our 2018 question, which is the one I’m asking you, as you look back to your career… and you probably have a dozen answers to this question, given as many trades as you place. As you look back in your career, what’s been the most memorable investment? So this could be long. It could be short. It could be a good one. It could be a bad one. Anything that comes to mind?
Todd: I always tell the worst story of first interstate when I was at Morgan Stanley and Keith Foriet [SP] was buying calls. And long story short is, you know, I went on a ride. I thought this thing was getting taken over. And everybody around the street was following this thing you know, basically on my word. And they came in and tried to sell 8,000 calls one Friday afternoon. And I bought the first 500 and got in shape. And they held off until the following session. And I guess Wells Fargo came in with $140 hostile bid versus an $80 stock. So I flipped from a multiple seven-figure win to a multiple seven-figure loss. I was 26 years old. I finally thought I figured out how to trade at Morgan Stanley, and I was pretty convinced that my life was over.
But as the case may be, it wasn’t. I ended up getting promoted that year, I think I was the youngest Vice President at Morgan you, know, at that time. And it was the process. The mechanics of the swing were more important than the results that you got back. And my process was sound. It was determined. And it was just an important lesson for me that, you know, you can’t get too high. You can’t get too low, you just gotta stick to your knitting in terms of the process, stupid markets and bad. And things will work out.
Meb: It’s funny, you mentioned that. I figured you would say that. I read that story in your book. And as I was reading it, my palms were like sweating, just thinking about the visceral experience of going through that. But you know, it’s funny for investors and in life… I was listening to a good podcast the other day with a producer that’s done a lot of famous films. And she said, you know, she loves to talk about her failure resume, meaning looking back at all the things that you really learn a lot from in her world, which would be bad films and bad partnerships, and everything else.
But thinking about it in trading. And we often say the best thing that can happen to a young investor is to have some bad trades when you’re young. That’s a little bigger size than I would say for most. But to have those experiences to learn from can certainly be wonderful guides for the future. And the biggest compliment we can give anyone in our industry certainly is simply surviving. Those of us who are still around and doing it, it’s a big compliment because it’s tough just keep doing it. And that’s a great story. Todd. So if people want to follow you, listeners to the podcast, what’s the best places that they can keep up with your writing, investing, and everything else?
Todd: I think Twitter is probably the easiest. And if you’re interesting that morning recap, again, that’s free talking about what’s going on in the cannabis world. I just think this is just such a fascinating time to be alive in the context of this dynamic really unfolding. And really just think about all the criminal justice reform, and all the sickness, and all the suffering that’s gonna be avoided. It’s just really just unbelievable that has taken this long to right this wrong. But it’s unbelievable that we’re in a place in history where not only we can be a part of it, but certainly, hope to profit from it because I think this is probably one of the most profound investment opportunities of our lifetime.
Meb: Well said. Todd, thanks so much for joining us today.
Todd: Yep, thank you. I appreciate it, guys.
Meb: Listeners, we’ll add show notes with Todd’s website and Twitter handle, and all sorts of other goodies we mentioned today at mebfaber.com/podcast. You can send us notes, feedback, questions, criticisms, firstname.lastname@example.org. We’d love to hear from you guy. Leave us a review, if you’re loving the show, hating it. And subscribe on Overcast, Stitcher, my current favorite app, Breaker. Thanks for listening, friends. And good investing.