Waiting to Exhale

I went on TV in 2012 and said that cannabis was my single-best investment theme for the next decade.

I had just begun studying the science, so I spoke only of the potential economic opportunities and societal benefits: tax revenue, job growth, prison populations and crime rates. Unbeknownst to me at the time, I had entered a rabbit-hole of intellectual curiosity from which I’ve yet to emerge. Efficacy-driven wellness. It was a huge concept, but I knew I was early.

Fast-forward six years and many will argue it’s still too early, while others are betting that it’s too late.

The former, a large swath of the global population, is tainted by 90 years of misinformation that’s been perpetuated by those we see benefitting from the status quo, which began with William Randolph Hearst defending his paper empire and continues with big pharma protecting their prescriptions. They view cannabis as a gateway drug or cite moral conflicts and the conversation ends there. We believe that many of them will evolve into late-cycle adopters that provide future layers of demand.

And then there are those who always got it and continue to get it, although many are where I was six years ago: totally gung-ho on the notion – true believers – but operating with an incomplete understanding of the science or application spectrum. They enjoy using cannabis as a social lubricant or they know one-off use-cases, such as helping cancer patients with pain and appetite, or as an opioid terminus. Even so, they’re confused as to who is going to smoke all this weed.

What both sides are missing, and what we’ve spent the better part of the last decade researching, is the underlying science as it pertains to wellness and the dynamic use-case agility of the end-products, which will paradoxically benefit from the same supply glut that cannabis bears are leaning against. Also, tomorrow’s cannabis consumer won’t just smoke it; they’ll drink it, eat it, rub it on, take it as a pill, or wear it as a patch. They’ll take bubble baths in it.

Other cannabis investors with whom we speak perceive cultivation as a service-station to stoners with some medical stuff on the side, and they model the opportunity as a discretionary vice, such as beer. The short-base in the stock market seems to reflect that sentiment as bearish bets against global cannabis stocks have increased to a record $2.1 billion, according to IHS Markit. Those shorts will eventually have to cover, creating yet another layer of forward-demand.

We would agree that valuations in the Canadian majors are rich if they were valued as cultivators. But these aren’t farming operations, they’re biotech companies in costume, large-scale producers of consumer-packaged goods, or both. They’ll use cannabis and hemp as base-line ingredients for an array of end-products ranging from medicine to cosmetics to pet supplements to plastic composites and more, and their margins should improve as cannabis prices decline.

The medical community also is behind the curve—just roughly one-in-ten medical programs study the endocannabinoid system (ECS), up from a mere handful last year—largely because cannabis remains on Schedule I and generally is off-limits to research. However, pioneer scientists already know that the cannabinoids found in cannabis are identical-in-action to what our bodies produce and that a decline in the ECS is probable as we age, which may be responsible for a host of currently unmet medical conditions.

If maintaining endocannabinoid tone becomes increasingly challenging as we age, and scientists have discovered a retrograde pathway to help rebalance our endocannabinoid system, the implications for health and wellness are immense. We remain firmly of the view that cannabinoid wellness is impact investing that will disrupt healthcare and that is something that is most certainly not priced into the market.

We’re not waiting around for clinical validation; that will take time and the biotech companies in our portfolio will follow that more traditional FDA pathway. We’re building exposure in companies across geographies and verticals that focus on things like method of delivery and bioavailability. Most of our portfolio holdings aren’t covered by Wall Street nor do they have institutional holders, which is by design.

Given the artificial impediments created by the U.S. government, Wall Street and the stock market must play catch-up, which is rare indeed given that both are forward-looking discounting mechanisms. Therein lies the risk and reward of our wellness strategy as we lay in wait for an efficient market. We can’t tell you when the proverbial lightbulb will illuminate above the societal structure, but we believe we’ll be well-positioned when it does.


As the cannabis sector continues to work-off last Winter’s excesses, we sense momentum building behind the scenes. The World Health Organization, in preparing a review for the United Nations, recently cited a “wealth of preclinical literature” that shows cannabinoids “reduce cancer cell proliferation” and inhibit “cancer cell migration and angiogenesis in numerous cancer cell types.” The committee also examined several qualifying conditions, including epilepsy, neuropathic pain, PTSD and sleep disorders, among others.

We’re also waiting on several legislative initiatives at the Federal level, presumably aimed at diffusing cannabis as a Democratic calling-card ahead of the mid-term elections, and we’re expecting the approval of GW Pharmaceuticals’ Epidiolex, which for the first time in history will demonstrate plant-based efficacy that is recognized by the FDA. Congratulations to the team there — true pioneers.

Other upcoming catalysts include the announcement of licenses for Ohio and Massachusetts, the U.N. final review of CBD and pre-review of cannabis and cannabis extracts, C-45 in Canada, the Oklahoma medical marijuana vote, the Farm Bill and the New York State report on adult use.

As always, please let us know if you have any questions or comments, and thanks as always for your continued support.

Todd Harrison
Chief Investment Officer
CB1 Capital Management

Disclosure: CB1 Capital Management may have positions in any securities mentioned. The mention of specific securities on this website is not a recommendation to buy or sell such securities. There is no guarantee that any of the securities mentioned on this website have been, currently are, or in the future will be, owned by CB1 Capital Management in its clients’ accounts nor that any of such securities have been, or will be, profitable.

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