Winter is Coming
As financial markets braved global headwinds in November, cryptocurrencies collapsed under the stress of their own weight. With so many crosscurrents in our midst, you may be wondering why we’ve highlighted that dynamic and the chart below will provide that answer; the white line is bitcoin and the orange line is the BIoomberg Global Cannabis Competitive Peers Index, since June 2017.
In mid-November, I said to our team, “If they think this is crypto, they’ll sell it like crypto” and that foreboding sense of doom cast a dark shadow across our space and evolved into the inspiration for this month’s cheeky title. Winter of course will come, and spring will invariably follow and when it does, the sun should illuminate the distinctions between these two very different asset classes.
For starters, crypto is an emerging phenomenon while cannabis has a 30,000-year relationship with humanity, mostly through the lens of health and wellness. And to our knowledge, crypto doesn’t have billions of dollars in revenue coming online in 2019, which should continue to scale with education and adoption. Finally, crypto doesn’t possess an efficacious agility that will disrupt western medicine across numerous indications.
Both share similarities that echo the dot.com bubble and bust regarding duration risk; everything they said technology would be proved true, but not before the tech crash. Given the chasm between the current perception and eventual reality of cannabis, our space continues to be vulnerable to downdrafts until revenue growth comes online or our catalysts arrive.
There’s no mistaking the pent-up institutional demand. BlackRock president Rob Kapito, speaking at an investor conference in Toronto last month, said, “We will be investing [in cannabis] but right now because of issues with states and the U.S. federal government, some of our custodians will not clear cannabis stocks and we will have to wait until that happens.”
If the tenor of our incoming phone calls is any indication, BlackRock isn’t alone. Investment banks are scrambling to better understand cannabis as a function of investor demand and when Wall Street rolls out coverage, we expect institutions to embrace the space. Some bankers have chosen not to wait, as evidenced by Altria Group’s C$2.4 billion investment in Cronos Group Inc.
The near-term forward catalysts can be framed in three buckets:
U.S. – States
With the addition of Michigan, Missouri and Utah in the mid-term elections and signs that New Jersey, New York and Connecticut look to drive the eastern seaboard online in 2019, the momentum is clear: the lure of additional tax-revenue, steady job growth, lower crime rates and unclogged courts is proving too much for many states to resist.
U.S. – Federal
Once the Farm Bill passes, all eyes will turn toward banking reform and a Democratic House should allow that to progress. House Rep. Earl Blumenauer (D-OR) has already released a memo containing a committee-by-committee breakdown and timeline outlining how to move ahead with legislation that would feed into a package of cannabis reform bills. House Rep. Jim McGovern (D-MA) is expected to assume control of the House Rules Committee from the departing Pete Sessions, and he has indicated that, unlike his predecessor (who did so dozens of times), he “will not block amendments for marijuana.”
On December 7, the World Health Organization declined to publicly release an official recommendation to the United Nations Commission on Narcotic Drugs regarding the rescheduling of cannabis in all forms, stating that it needed more time to complete its analysis. The UN Commission on Narcotic Drugs is still expected to vote on the 10-year scheduling of cannabis in March 2019.
We again took money out of the market at the beginning of the month and allocated that capital to new offerings and discounted bridge deals (for future offerings).
While we understand that public listings are a source of liquidity for some private investors, we’ve focused on certain of these issuers that we think will be leaders in the space as we believe that’s how institutions will articulate their forward investment theses. We’re still early in the cycle, but we view this as an opportunity to own these names in a liquid market before large U.S. institutions enter the space, and many of our catalysts remain ahead of us.
One important difference between the reverse-takeover mechanism used to list in Canada and the IPOs that list on U.S. and Canadian exchanges is that RTOs have no institutional post-deal support. We saw that last month with Curaleaf Holdings, which continues to trade below its the offering price, and more recently with Acreage Holdings, Harvest Health & Recreation and Cresco Labs. We have been able to build our holdings in some of these names at prices well below their RTO price.
To illuminate the thought process behind our portfolio construction, we share the chart below, which lists several U.S. operators and their Canadian counterparts, as of early December. The enterprise value to sales columns on the far-right paint a particularly compelling argument as we continue to lay-in-wait for an efficient market. Contrast this chart with our Top Ten Positions chart on the following page.
As always, please don’t hesitate to contact us if you have any questions. Best regards for a healthy and happy holiday season to you and your families.