CB1 Capital Management CIO on Pharmacy Chains Entering Cannabis Space

CB1 Capital Management Founding Partner and CIO Todd Harrison is not surprised by recent backfilling in the market given the tremendous first quarter many cannabis stocks experienced. He notes that many of CB1 Capital’s MSO holdings had great quarters and current market conditions are creating good entry points for many names. Harrison discusses the “non-euphoric” uses of cannabis and believes there is still considerable adoption and upward movement to come as industrial, medical, and consumer use cases are publicized. He explains the importance of institutional adoption, especially in the retail pharmacy sector, where giants CVS Health Corp (NYSE:CVS) (FRA: CVS) and Walgreens Boots Alliance Inc (NASDAQ:WBA) (FRA:W8A) have recently entered the CBD space. Harrison provides his take on Canaccord Genuity Group Inc (TSE:CF) (OTCMKTS:CCORF) (FRA:C6U) downgrading Cronos Group Inc (TSE:CRON) (NASDAQ:CRON) (FRA:7CI) from a hold to a sell.

Transcript:

Howard Glassman:   There’s the Midas Letter orchestra, and we’re making our way through another show. What a pleasure to welcome back a semi-regular, you know him. He’s the founding partner of CBI Capital Management: Todd Harrison, thank you very much for taking some time with us today. How are you?

Todd Harrison: I’m well, thank you. How are you?

Howard Glassman:   Fantastic.  You know, I was just – I have a couple of things open here, and I want to talk about some of the stuff that’s happening in the markets. I know it’s been kind of a smelly day, but I love that you’ve written some books. One of my favourite titles: In Business, it Pays to be an Animal, and in Life, it Pays to be Yourself. What does that mean, exactly?

Todd Harrison: That’s what you want to talk about with cannabis stocks taking you on the chin today, I’m happy to talk about it…

Howard Glassman:   Just very quickly, I thought we would warm up with that, and then we would talk about cannabis stocks.

Todd Harrison: Good, it just means stay true to who you are, stay true to yourself. All you have is your name and your word, and you do the right thing long enough, people will eventually take notice.

Howard Glassman:   That’s very interesting. I just wanted to – because here’s the thing, Todd: we can get right to cannabis stocks, but I think it’s good that people know that you’ve written some cool books, that one included. So let’s talk about some of the stuff. As I mentioned, the market’s kind of in general, not having a great day, and specifically, weed stocks are kind of smelling.

Todd Harrison: Yeah, well, I mean, both the stock market and cannabis stocks writ large have had pretty amazing first quarters, so I don’t think some backing and filling should shock anybody. I don’t think necessarily anything has changed. I don’t know, from the market, you know, right here, 2800 on the S&P as we’re taping this, is a bit of an inflection point, but you also have quarter-end in a couple of days, so that’s certain to cover in price action.

But with regards to cannabis, you know, listen: if you find the right names, you’ve got to use price to your advantage, and days like this lets you backfill into some names that maybe have gotten away from you. So that’s what we’re looking at. We don’t see much that has changed our thesis. We’re still heavy US names, we’re still heavy biotech. We’re a little lighter Canada, just because of a few of the valuation disparities that we’ve talked about in the addressable markets we see. So it’s just go along, get along, loose grips on the handlebars today for us.

Howard Glassman:   And are these the kind of days when you advise people just to take a little less emotional look at things, as opposed to, you know, seeing numbers maybe a little softer? The first quarter, as you mentioned, was great for a lot of sectors, cannabis included, especially after the last quarter of ’18, which was putrid. Are these the kind of days where you just ask people to just be patient, or –

Todd Harrison: I don’t ask people to do anything. You know, for us, you know, as we look at some of these names, a lot of our core exposure, we have three to five year horizons on, and we’re less worried about the news flow on any given day versus the price action. So we try to just trade around our core positions, you know. A lot of them are MSOs, a lot of our US names have had great quarters, you know, and certainly some backing and filling makes sense here. So like I said, you know, we still see the asymmetric opportunities on the horizon across a number of different names, and a lot of mis-priced merchandise as sort of a function of the opaque nature of the cannabis market right now.

And these names and the lack of Wall Street coverage is really creating some opportunities, so we’re looking for those. But, you know, certainly, as we look at this volatility, it’s nothing new for anybody that’s in the space for any amount of time.

Howard Glassman:   Well, and the reason – I know you’re not recommending this, but you know, a lot of the people that are watching the Midas Letter are looking for any clue as to when they should or shouldn’t take action, and I guess that’s what I was kind of asking. Like, you know, these are kind of the days where maybe sit on the sidelines…you’re smiling, you’re like, I don’t know, Howard, what kind of question is this?

Todd Harrison: Well, everybody has a unique time horizon and risk profile, so you know, anybody that’s out there saying you should buy this or you should buy that without an understanding of time horizon and risk profile of their audience, I think, is doing more harm than good. You know, I think there’s great opportunities here, you know, across the landscape, if you sync your time horizon and your risk profile. Keep some powder. Understand they’ve just had a monster run, and certainly as we look out, you know, over the next three to five years, I think there’s still a lot of movement left in these names, a lot of onboarding, so to speak, to portfolios, as more understanding about cannabis and about the wellness and about the efficacy and about, really, the use cases – not just about getting high, but I’m talking about the non-euphoric use cases, the industrial use cases, the consumer use cases, and the medical use cases, right? Biopharma. Most people don’t even think cannabis biotech is a sector, yet; we think it is.

Howard Glassman:   I love – you know what, I love that, and it’s something that I’ve thought a lot about and interviewed a lot of people on my other show about the idea that when legalization was on the horizon, everyone giggled and thought, Oh great, now we can get high, and I was like, What? Everyone’s already getting high. What I knew, and what you just mentioned, and we’re going to get to Walgreens, is, I knew that the big push in all of this was when an – and what’s the phrase you used? The non-psych –

Todd Harrison: Non-euphoric.

Howard Glassman:   The non-euphoric use. And I used the example of Shoppers Drug Mart here in Canada, but Walgreens, you’re going to tell us that they’ve just announced, like a lot of – where formerly it was a pharmacological play, there’s going to be this huge influx of cannabis nutraceuticals, whatever that sector is called. And you’re going to tell us that Walgreens is adopting this model.

Todd Harrison: Oh, I think everybody is going to adopt this model. You know, again, denial, migration, panic: I think we’re starting to see a migration, not only on the consumer side – we saw CVS, obviously, and Walgreens now – but I think you’re going to see more of an adoption across the financial side. Black Rock, I think it was last week or this week, these weeks are all starting to forge together, but their words that they’ve started to take positions in some of these US operators. So if that’s the case, I think we’re much closer to the migration, then, than even we thought we were.

But that’s going to happen, banking reform is being debated right now as we’re taping this. We don’t necessarily expect any surprises, but certainly this is going to be a process; this is going to take time. I think if you have the right time horizon and the right risk profile, and the right approach to this, you know, you look at days like this, you look at the delays, like we saw in New Jersey and maybe New York, as opportunities, right? The longer that this drags out, the more pressure is going to be on these names; but if you believe that this is going to change and this is going to go through a critical pathway, and this is going to go through a regulatory pathway, and banking, and the clinical trials, and all told, this is going to be adopted by society, then again, the best days are in front of us, right?

I mean, we anticipate there’s going to be a large amount of cannabis hedge funds, a large amount of cannabis ETFs, a large amount of cannabis, you know, products out there, and they all have to buy these stocks. So we’re getting in front of that. We don’t, you know, claim to know when that’s going to happen, but we do think it’s going to be over the next 12 to 18 months.

Howard Glassman:   But if you think about the growth opportunities in terms of just cannabis as an item, it isn’t just as we said, it’s not about getting high and giggling; there’s this whole, you know, non-psychotropic, therapeutic use. But a lot of people when they first heard about legalization, equated it to alcohol. And the mistake in equating it to alcohol is, they don’t serve alcohol as a therapy in Walgreens or CVS or Shoppers Drug Mart.

So there’s this whole huge, therapeutic, CBD as a – whether it’s fighting anxiety, migraines or Parkinson’s, there’s all this stuff. And what you said there about all the various steps to make it – I don’t even know if the word is legitimization and the corporate legitimization of cannabis as a product. And that’s kind of what I think is interesting, not only as an investment, but as a consumer.

Todd Harrison: Well, you touched on two points. Number one, you know, CBD is all the rage right now, but it’s also important to remember that’s one cannabinoid, right? THC is another cannabinoid. CBN for sleep, another cannabinoid. CBG. There’s hundreds, right? So that story still needs to be told in the marketplace, right? But you know, you talked about cannabis as a product. I humbly disagree. Really, the cannabis in hemp is ingredients, right? And those are being ingredients that are being worn to everything from cosmetics and vanity to industrial use cases like hempcrete and animal feed, to medicine, right?

And if you understand the science, and that’s where we really try to focus our energies, because we follow the science. And the science is telling us that cannabinoid wellness is a viable alternative across a range of indications, and we say an efficacious agility, right? And this is impact invested. This is going to help ease suffering, and the side effect profile is de minimis compared to what Big Pharma is peddling out there.

So this is, you know, we’re on the right side of history, here. It’s bumpy for sure, but the frontier usually is. But again, and this is the first time we’re talking, but we’ve talked on this show a lot about how this is, you know, this is a 30,000 year conversation. Cannabis has a relationship with humanity across cultures, across different, you know, continents…it’s all through the lens of health and wellness. In the last 90 years, some politicians have decided that this is a gateway drug and this is terrible for society, and the facts just aren’t there, right?

And there’s people out there still trying to peddle this story that this is this and this is that, but follow the science. It’s going to take us to where we think is going to be a secular bull market that’s just taking shape as we speak.

Howard Glassman:   Just a couple of things before we let you go. I know that Cronos Group was downgraded by Canaccord Genuity from Hold to Sell. And why?

Todd Harrison: Well, I mean, their valuation to their assets is just – we wrote about this on Twitter two days ago – it’s just not there. I mean, they have a great biosynthetic arm, they have obviously Philip Morris or Altria mo. behind them, but you know, at the end of the day, you need to have a footprint. You need to have some sort of metric. And because that’s listed on the NASDAQ, similar to Tilray and even, some would say, Canopy, you know, it’s become a beacon for institutional investors who need to check a box that, the first thing they check is a liquidity box, right?

So it’s a self-fulfilling migration. As people want cannabis exposure, they’ve reached for Cronos, they’ve reached for Tilray and Canopy. But as more names come on – CannTrust is a name we own, they report tomorrow – as more names come on NASDAQ, Village Farms another one, I think investors are going to do the work, analysts are going to do the work, and they’re going to see better relative values, mis-priced merchandise, inefficiencies in the market that are going to be solved for when Wall Street adopts this writ large. So there’s still those opportunities, but again, you’ve got to do the work. And I think, you know, Cronos is just – you know, there’s no there, there, from a valuation standpoint that you could point to other than the fact that it got a great, you know, a great investor in their back pocket.

Howard Glassman:   Well I think it’s interesting, and I’m glad we had this conversation – it was great to talk to you about it, because I am fascinated from just a guy in the street basis in terms of where the growth in cannabis is, and I don’t think the average person yet, especially in Canada, realizes, has delved into, the variations and machinations of this industry beyond a psychotropic get high and watch Netflix. And as you say, there’s so many – I love, I wrote this down: efficacious agility, is that right? I love that.

Todd Harrison: Yeah, well, we think so, and we think the science is going to prove that through. And I’m not talking about pain, appetite, nausea, anxiety and stress, right? You know, we have, you already have an FDA-approved medicine for epilepsy, for childhood onset of epilepsy. We’re real keen on this brain cancer trail that GW has, we’ve been talking about it for a long time. But if you understand the science and the role of the endocannabinoid system in regulating neurotransmissions, and how ubiquitous of a network of receptors the endocannabinoid system is, and the ability to use that network as a retrograde pathway to wellness, and be able to target receptors with specific cannabinoids, it’s fascinating, right?

And that’s the part of the story that gets us excited, because nobody really knows it. There’s a concentrated – there’s a handful of people in the world who really get it. That’s going to change, and we’re seeing, you know, Oxford University last year launched a curriculum, and they’re popping up. So you know, this is happening right now, as we speak.

Howard Glassman:   Well, absolutely, there’s that level, but at several levels below that there are people, whether it’s Oxford or other huge institutions running, are starting to gather information that wasn’t available before because now it’s kind of out of the closet in terms of people sharing their use of cannabis. And now we’re going to find out the many, many ways we don’t even consider yet, or haven’t considered, that it will help us, again, beyond just a ‘now it’s legal, we can buy it without worrying about going to jail’.

Todd Harrison, what a fascinating character you are. We started with a book, and now we’re buddies. Thank you very much from the – he’s a founding partner of CB1 Capital Management. Todd, thanks for joining us today. Appreciate it.

Todd Harrison: Thank you, thank you, have a good day.

Howard Glassman:   All right, you too. Take care.

Original article: CB1 Capital Management CIO on Pharmacy Chains Entering Cannabis Space

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