CB1 Capital CIO Todd Harrison on Aphria Inc (TSE:APHA) and US Cannabis Company Picks

CB1 Capital Management CIO Todd Harrison talks about the growing negative sentiment in the US cannabis space after Hindenburg Research’s report on Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E). Despite the negativity, Harrison is still enthusiastic about a lot of US players ahead of a number of catalysts. He notes that industry leaders like Tilray Inc (NASDAQ:TLRY) have held their positions, but notes that many good companies are being “thrown out with the bathwater.” Harrison cautions that the risk in the cannabis space is a duration risk and that the current despondency of people in the cannabis space is not consistent with the opportunities that exist for long term investors. He addresses growing concerns of a recession and discusses the steps CB1 Capital takes to guide its positions through downturns.

Transcript:

Todd Harrison: Hey, fellas, what’s going on?

Ben Smith:    What’s going on, Todd?

Ed Milewski: That’s why we called you, Todd. We want to know what’s going on!

Ben Smith:    Now, Todd, if I could lead the question here, I’ve been dying –

Todd Harrison: [inaudible]

Ben Smith:    I want to lead off with a question here, I’ve been, you know, I want to get your take, and I asked Alan Brochstein a similar type question pertaining to Aphria; I wanted to get your take on it, because it seems to be some leaching into the sentiment down on the American side, which you’re most concentrated in, although your fund, you own stocks on both sides of the border. Are you starting to see a leaching in of negative sentiment south of the border with the Aphria situation? And if you could just give us your overall take on what you’re seeing there and what you’re looking for, and perhaps whether you’re a buyer, if certain benchmarks appear, stabilization benchmarks appear in the future.

Todd Harrison: Yeah, no, it’s certainly not helping. There’s a lot of US banks that I think are ready to roll out coverage of the Canadian space and the US space, the banking comes through. I don’t think there’s a legal department on Wall Street right now that’s feeling real good about that, considering that Aphria was really considered one of the chosen ones. That was a safe one, it had a New York Stock Exchange listing, it had institutional holders, it had analysts researching the stock…now, I can’t speak to the allegations, I don’t know the allegations. I think that the silence is deafening from the company, and that’s probably one of the main things that’s really weighing on this.

You know, I remember in the great financial crisis, Bear Sterns went down, you know, a lot, and they blamed the rumours and the short sellers; and I said at the time, if rumours can move a stock that much, you know, how strong is that company? And I think that’s the question right now for Aphria. But, you know, Matt Bottomley, who’s pretty good, over at Canaccord, he assigns I think a $13 valuation for the Canadian assets; I think at the very least, you get a sum of the parts play here. So I’d be more bullish than bearish, you know, down here in the abyss. But really small trading position, that’s it.

Ben Smith:    Very good.

Ed Milewski: What are some of your favourites, Todd? In the space?

Todd Harrison: Well, we like the US. It’s been wrong, but we like the US players in front of what we think is just a number of catalysts coming down the pipe, and you know, we’ve seen what happened to these RTOs that came public, whether that’s the Curaleaf or the Acreages or the Crescos or the Harvests of the world. You know, I think once all this indigestion works itself through and people look at valuing these things going forward, I mean, we saw the Cura stock buy-back today, which was a bit astounding, but nonetheless, you know, by our pencil, you know, this company could do 400 million next year and almost double that the year after.

So you’re talking about buying 5x 2019 revenues, 2.5X 2020 revenues; when you are a Wall Street analyst and you do the work, we think they’re going to like what they see.

Ben Smith:    Now, Todd, since we’re talking about Aphria, do you think one of the problems right now is the market is digesting just what to believe on the analyst side right now, considering there’s a fair market opinions based on assets that are transferred from Aphria and others, based on, say, the Canopy Growth full-year revenues from GMP Securities, which ended up being, you know, an over-estimation? Now, granted, factors were involved for that cut to happen, but do you think there’s sort of a crisis, or maybe not a crisis, but do you think there’s some skepticism in terms of what can believed in terms of full-year revenues in, you know, 2019 and 2020, and that’s sort of leaching into and people are just not buying it, and selling off stocks until there’s more visibility?

Todd Harrison: Yeah, no, I mean, we talk about this a lot. The risk in this space is the duration risk, right? You’re basing these companies on 2019, 2020 numbers, and it’s only 2018. So you have this soft underbelly of vulnerability here, yet you can point to some catalysts. But on a pure numbers standpoint, you’re looking at companies that are valued at $1 billion, $2 billion and they’ve done peanuts this year in revenue, and of course you’re going to roll your eyes.

But this is a bumpy rollout. This industry is coming back online after a 90-year hiatus and a lot of misinformation, so of course it’s going to be bumpy. Buildouts and rollouts are never sexy, per se, but it’s laying the groundwork for the next five or ten years. If you’re buying these companies on this quarter or next quarter, I think you’re going to be disappointed; if you’re laying into positions for, I think, the next five years and the companies that are going to really emerge as winners, I think you’re going to be very, very well off, and that’s what we’re trying to find here.

Ed Milewski: Interesting. I noticed yesterday Tilray’s still over $100, and you know, the DOW was down 800. Do you think it’s significant if Tilray still stays above 100, or does it matter? I mean, you know, I think the last time I looked, the market cap is still, you know, $7 billion, $8 billion, and it came out at, what, $17? So still a very, very big winner in the space.

Todd Harrison: Yeah, no, that’s certainly been a confounding issue. I mean, we were sitting here thinking internally – we don’t have a position in Tilray. We had some for a while, we sold it when we thought fairly valued, a little bit above that, even, but we’ve been sitting here wondering if the rest of the cannabis tape could hold up while Tilray, you know, trades to a more reasonable multiple. And instead, you’ve seen Tilray hold up while the rest of the space has just gotten creamed.

So I have no insight. I know it’s a closely held company; we’ll see what happens when more stock comes to the market, but there are babies with the bathwater that are being tossed out, there. I think you just need to do your work and be a little bit patient. I mean, it’s bloody out there, but there babies in that bathwater, and this is where the opportunities are if you can do the work.

Ed Milewski: Yeah, and the fact that the DOW was down 800 yesterday, and this is maybe not just on the marijuana space, but you know, looking ahead, are we going to hold here, are we going to trade? Are we, some of our people argue that we’re still very early in this monster bull market. What’s your view on that? Have we seen the top? These are difficult questions; I’m just looking for your opinion, Todd.

Todd Harrison: Yeah, no, I don’t mind difficult questions. You know, I think that, as I look at the tape, I look through the world markets, I look through the sector markets for the US – I don’t see much that’s very good, to be honest with you. I was talking about this yesterday with somebody, you know: it’s market of stocks, not a stock market, so when you start big components or leadership components fail, and now, at the very least, you might be putting in some pretty ominous-looking head and shoulders patterns across the S&P and the NDX. You know, I think it’s, you know, you’re playing a dangerous game. I don’t know, is the right answer. I don’t know what the market’s going to do. I think anybody who tells you they know is full of shit. But I think I could make a case right now that the best days of tech right now are behind us; it’s crowded, you have a lot of sellers on the way up.

One of the things that we’re looking at for cannabis, and of course, retail hands holding cannabis doesn’t help with the volatility; but we think over the next five or ten years, you’re going to see a movement of the institutional money into the cannabis space, because that’s going to be where the growth is. But for the broader tape, you know, I don’t see much to get excited about. You got some performance anxiety at year-end, but there’s some really, really ugly looking charts around the world. So it’s prudent to be a little bit careful until the resistance clears.

Ben Smith:    Okay. And I know we’ve talked about this on Twitter; I think you know my position on this, that it appears that we’re in the end of a bull market cycle, it’s gone 9 and a half years, second-longest on record. Now, that being the case, that being the case, if we are entering a recessionary period where the market could get hit, does CB1 capital put on the brakes in terms of the positions that they have? Will you end up hedging some of those positions against, let’s say, shorting the SPYs or the Qs or whatnot, or do you kind of put the brakes, or do you just look five and ten years ahead and say, you know what? We don’t know where the bottom is; we are just going to buy because we think in 5 or 10 years, you know, Curaleaf or iAnthus or whatever big positions, are going to be at X value?

Todd Harrison: Yeah, no, it’s a great question. We hedge our book, insofar that we’ll take 1 to 5 percent of assets and keep them in non-correlated hedges, S&P, SPY, or Pew hedges spreads as the case may be, but that’s really as a buffer more so than as a pair.

But we will raise cash; you know, we have for the past couple months taken money out at the beginning of the month in anticipation of maybe some softness. But to your point, you know, I can’t tell you when, you know, these catalysts drop, and I can’t tell you necessarily, you know, when the market will start to price in the forward catalysts, be that the Farm Bill, be that banking reform, be that UN resolutions, be that New York and New Jersey coming online, all of which are expected to happen; all of which are bullish and the beginning, I think, of a great investment cycle here.

So yeah, we’re buying weakness in the names that we think are right: names like iAnthus, names like some of the MSOs that we talked about, and understanding that we could be early, and we could be early for a while. But like I said, there’s no institutional research out there on the US side, so we’re doing all of our own work here and making a bet that when the analysts from Wall Street come in and do the work, they’re going to see what we see: these companies trading at 2.5, 3X 2020 revenues, and just a tremendous growth in the space, and I think the space is misunderstood.

People look at the flower and they see an end product; we look at the flower and we see an ingredient. So we don’t think that optionality is reflected; we don’t think the efficacy is reflected. But all of that has to come through the pipe, and until it does, you got short sellers all over these names, and nobody really able to defend it because revenues are still a year on the horizon.

Ed Milewski: Very interesting.

Ben Smith:    Great answer.

Ed Milewski: Todd, thank you very much. We’re going to wrap it there, and always appreciate your comments. It’s – it just, here in Canada, sitting here in Toronto, it feels – I can’t help but feel a little sad, to be honest with you. It just looks, I think we’re going to find out a lot of answers here in the next few days. Well, hopefully we do.

Ben Smith:    Yeah, again, it was nice meeting you, Todd.

Todd Harrison: Let me say this, Ed, because I think it’s –

Ed Milewski: Go ahead.

Todd Harrison: Yeah, can I say one more thing?

Ed Milewski: Yeah, absolutely.

Ben Smith:    Absolutely.

Todd Harrison: Yeah, so, you know, there’s just, there’s just, you know, a lot of despondency out there. I mean, people who I’ve sort of befriended over the years on Twitter are just sort of, you know, throwing the white flag in and saying it’s all over. I mean, you know, the euphoria six weeks ago had these things 50 percent higher, and the despair now, I don’t think is consistent with the opportunities that are out there. It’s just, again, you need a little patience. We like to say keep loose grips on the handlebars here, because it’s going to be really bumpy. But this is the beginning of the cycle, this isn’t the end of the cycle. And for whatever that’s worth, that’s how we’re approaching the forward price action.

Ed Milewski: Yeah. Yeah, I know. Okay, thanks, Todd.

Ben Smith:    Great, great. Thanks, Todd.

Ed Milewski: See you later.

Original article: CB1 Capital CIO Todd Harrison on Aphria Inc (TSE:APHA) and US Cannabis Company Picks

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