CB1 Capital Management CIO Todd Harrison on Hemp as Global Investment Opportunity
CB1 Capital Management CIO Todd Harrison discusses the issues facing US MSOs and the rise of hemp as an investment opportunity. He warns that California, Washington, and Oregon are serving as a cautionary tale at the state level, in terms of the strength of the illicit market in those states. Harrison believes with time and greater enforcement, the illicit market in those states will evaporate. He asserts that hemp is going to be ubiquitous and believes that the cannabis wellness market will experience a bifurcation between products marked as containing CBD, which make specific health claims, and products marked as “full spectrum hemp oil.” Harrison comments that hemp is an alternative for many everyday products and is an unexplored global investment opportunity that simply requires reclassification at the international level to take hold. Harrison stresses the importance of banking reform for MSOs and shares his thoughts on Cresco Labs Inc’s (CNSX:CL) (OTCMKTS:CRLBF) acquisition of Origin House (CNSX:OH) (OTCMKTS:ORHOF) (FRA:CY4).
James West: Todd, I want to start with a conversation with an overview of, let’s just call it the superior performance of US issuers on the Canadian exchanges relative to Canadian issuers. Certainly you’ve been an advocate for the preference towards the US MSO story relative to the Canadian story, just because the Canadian story is long in the tooth relative to the US MSO story and there’s so much more money in the United States. At this point today, does this hold true at this outset of Q2?
Todd Harrison: Well, that’s not necessarily the only reason why we prefer the multi-state operators. I mean, there’s, you know, we’ve spoken a lot about the artificial impediments in the US market and why these companies have to go to Canada to list. You know, US institutions, we think, are clamoring at the gates to get involved in this space, and a large part of our preference for US operators is that asymmetry that arrives when you have all this latent demand on the horizon in the form of US institutions and/or Canadian majors. The LPs, we think, are going to turn buyer too, and you have valuations which are, in some cases, 60 or 70 percent cheaper than Canada.
And as you know, just in LA, you know, the end products are really where it’s at. I mean, this is what the consumer is going to, the consumer preference, we think, is going to continue to migrate away from the flower and toward end products where you can eat it or drink it or rub it on, or, or however you want to consume your cannabis, but it’s going to be less about smoking it I think in the future. And that’s where the money is, right? As the price of cannabis goes down over time, anybody that’s using cannabis as an ingredient their margins are going to get better, right? Their input costs are going to go down. So that’s why we’re focusing on that side of the equation.
James West: Mmhmm. It was interesting to me in California, the uniform complaint from most of the operators there is that the market is saturated. I read a story that in the Los Angeles Times that suggested there was five times more supply than there is demand in the California market in total, and that nine out of ten of the dispensaries and cultivators and extractors and product manufacturers are still not legal. Meaning they don’t have to pay or collect the 40, up to 40, percent excise tax that’s being levied against consumers who patronize the legitimate dispensaries etcetera. So I’m curious, from your perspective, what does that mean for investors looking to position in the investment opportunity in California?
Todd Harrison: California’s a tough, California, Oregon, and Washington, you know, have been cautionary tales of um at the state level. There’s a lot of states out there that we think are doing it in a more efficient way. And ultimately, as people talk about the next step for US cannabis, we don’t think it’s going to be legalization writ large. That opens a can of worms, a lot of issues that Canada went through, in terms of logistical issues, will be introduced through legalization.
We instead think it’s going to be decriminalization. You’ll leave it to the states, it’s politically, you know, sellable, if you’re POTUS right now and you wanna kind of sweep the legs of your democratic opponents, all of whom are advocating for cannabis, you make the issue go away before the 2020 election. You dress it up as a states’ rights issue, you save face with the, you save face with your base, and um certainly it is a states’ rights issue, as we saw with online gambling last year as the precedent at the Supreme Court.
So that’s where it’s going, you know, California’s a bit tricky. We actually love the deal that we saw, was it this week [chuckle], on Cresco and Origin House, so, we just think it’s a terrific deal for both sides, but really for Cresco, it had that footprint in California through the distribution, and really we see California emerging more as an incubation lab, for end products necessarily, than, than where we want to focus our attention as investors.
James West: Mmhmm. Alright, so, I was at a dispensary, it was private, and the gentleman who is a, who owns the dispensary, told me that he had done, he had done top-line revenue of $43 million for 2018, in that location, but that he was concerned that the absence of enforcement of the rules that would keep the black market supply out of the equation, a you know, was going to be more of a problem for him in 2019. He felt that the absence of enforcement was actually having a galvanizing effect to those who would enter market without being part of the legalized process cause they’re looking at all their brothers and saying, “well, if they’re not getting busted” I may as well start growing and selling cannabis at the local corner store.
So the thing for me is I look at all these dispensaries I go into all of them. I see mostly the same products on all of the shelves. So I think to myself I say self those product manufacturers are probably a good investment because they’re in all the dispensaries but the dispensaries themselves and the multi-state operators you have to compete with those unlicensed sources are going to continue to erode the opportunity in the states of Washington, Oregon, California etcetera. What point does the government step in and start to enforce this?
Todd Harrison: Well, that’s a lot of questions in one question.
James West: That’s my specialty.
Todd Harrison: I don’t have a solve for the black market cannibalizing the legitimate market, that’s going to take time. It’s going to take enforcement; it’s going to take trial and error. But ultimately again, if you’re focusing on the end products, I think it’s less about what you can necessarily compete with on the per cost basis for the flower and more about whatever your chosen method of consumption is whatever your chosen brand of consumption is.
It’s going to be like brands, like the consumer side anyway, and let’s not forget, there’s going to be an industrial side, and there’s going to be a biopharmaceutical side, but I think you’re speaking to the brand side. But you know, that’s not necessarily primarily why we like the MSOs here, you know, we’re looking again at this arbitrage of price and US institutions, and a lot of you as investors for that matter, still can’t purchase these securities that are not allowed, their platforms are forbidding them.
So we think that artificial impediment goes away over the course of the next 12 to 18 months. It’s going to create a lot more support, excuse me demand into the marketplace, and that’s I think the big story behind the MSOs right now and certainly, you know you can look at and we’ve done this and we’ve got all the fundamental analysis behind it and looking at the projections and what we think of projections are versus what some of the Wall Street firms think the projections are going to be in terms of adoption rate and we still think that there’s some good value out there. But certainly, you know, again, it’s versus 2020 not necessarily against 2018 and that’s how we’re looking at it.
James West: Sure. So what all needs to happen to make the stocks available to a broader swath of Americans?
Todd Harrison: It’s banking reform. I mean, that’s the Yahtzee moment for US cannabis. It’s going to be banking or form. And again, I think we spoke about this, you know last time I was on it with your colleague who is quite interesting, nice guy, you know, certainly we talked about the three things off the top of mind that’s going to happen. The cost of capital for these companies is going to plummet. It’s going to completely change their balance sheet change their ability to conduct business and that’s a big bull case here that that we see going forward that that’s a tailwind.
But then I think you’re going to see institutions by these names because institutions will chase growth. That’s what they do and there’s not many industries out there that are going to offer the growth profile of cannabis and again not about getting high. There’s a lot of use cases out there that are not about the euphoric side of cannabis, but whether you know, the active pharmaceutical ingredients in that or the industrial use cases hand as a farming, as a crop, is a very agile crop, and it’s going to be a renaissance of sorts for the American farmer. There’s a lot of ways to win here. This is all going to take time to come through.
James West: Mmhmm. I’m just wondering, you know the idea of the CBD from hemp. So the products that are allowed to be sold in the United States broadly are CBD from hemp which is essentially cannabis sativa with less than 0.3 percent THC, correct?
Todd Harrison: Mmhmm.
James West: And is the, is there a limit on the quantity of CBD that the plant can produce that disqualifies it as being categorized as hemp or is it all relative to that point three percent THC?
Todd Harrison: Oh I don’t know…
James West: Oh okay.
Todd Harrison: I’ll ask my analyst when he comes in but I do think Camp is going to be you know, a pretty ubiquitous, you know, a product in society. I don’t think it’s going to be necessarily labeled CBD. I think they’re going to reserve the CBD moniker for the pharmacy side for the clinical side. I think it’ll be called “full spectrum hemp oil” and it’s going to be pretty ubiquitous. I think the FDA is going to get its act together too. But again, CBD is one cannabinoids. THC is another cannabinoids. There are hundreds of them and that’s why we need more research. We need to open this up, we need to get to the bottom of it because I think we’re just scratching the surface what we don’t know about this plant dwarfs what we do know about this plan, but we know there’s a lot of efficacious ability we have to we have to untap here.
James West: Yeah an article in The Economist today focusing on industrial cannabis as it calls hemp interchangeably. It’s expresses that China grows nearly half of the world’s legal hemp. And so I’m looking at that thinking well, okay, if now the shackles have come off the ability of the American farmer to grow hemp, does that mean that the opportunity in the in the normalization of cannabis laws, does that actually open up other opportunities? I mean in terms of the potential for hemp in like clothing, as a construction material, as a plastic alternative, as a paper alternative? I mean is that possibly a whole as yet unexploited opportunity for investors?
Todd Harrison: Yeah, I think so. And again, if you remember in November the World Health Organization recommended to the UN that they reschedule cannabis. That was sealed until February, presumably to give them the cover to kick that vote to either December or May is the KR, excuse me, December or March as the case may be, but it’s going to happen. I think at that UN level, international level, of decriminalization, reclassification, whatever you want to call it, arrives, I think it’s going to open up the global commerce, global trade, as it should be again. You know, this has been unfairly demonized for the last 90 years when for, you know, 30,000 years before that, this had a very healthy relationship with humanity. So this is a return to normal. The prohibition is very much the exception rather than the rule.
James West: Yeah. That’s that’s that’s why we get along. So well, I believe that as well. All right, Todd, that’s a great contribution as per usual. I look forward to our next conversation. Thanks for joining me again today.
Todd Harrison: Yep. Thank you.
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