The Turn

August was a tale of two tapes as the trend that’s been in place since mid-January—selling, and a lot of it—came to a screeching halt the morning of August 15. That’s when Constellation Brands announced an additional $4 billion investment in Canopy Growth Corporation, the largest Canadian licensed producer, in a deal that will eventually give them control of the company.

It was a timely transaction as sentiment surrounding the space was sour and Constellation effectively reset the valuation of the industry bellwether 50% higher (and in the process, diversified future revenue streams to include nutraceuticals, consumer packaged goods and biotech). In the process, we believe they also established a durable bottom for the cannabis sector as we enter the final trimester of 2018.

A five-year look at the BI Cannabis Competitive peers index provides historical context:


It was a particularly volatile stretch; after continued weakness to start the month, overall performance popped 25% over the final thirteen sessions. It wasn’t a linear rally as the three U.S.-listed Canadian LPs saw the strongest demand and got the most attention, which is an encouraging sign for our strategy: we’ve accumulated over twelve million shares of stock in companies that we believe will benefit when Wall Street does the work.

In our continued effort to educate our investors, we’ll share a few thoughts across several regions and verticals:

Canada: Canopy Growth, Tilray and Cronos Group have rallied the most—and are by extension, the most expensive—given they’re listed on US exchanges. While we’ve owned them in the past, we’ve focused our current Canadian investment exposure on companies like Canntrust, Organigram, and Village Farms International, among others, which are comparable companies listed in Canada and trading at a substantial discounts.

United States: We’ve been overweight U.S. since the beginning of the summer as this is where we see the greatest opportunity to accumulate long-term exposure before institutions are legally allowed to invest in the sector. That presents a rare opportunity, for those educated, to front-run the institutions. Ianthus Capital, Liberty Health Sciences and GTI Industries are among the domestic holdings we favor.

If Canadian companies are the lead dog and the U.S is the body, Australia is the tail—and that tail has yet to wag despite existing synergies. Structural concerns surrounding the Australian economy / emerging markets temper our enthusiasm but we’ve planted seeds in AusCann (Canopy owns 9%), Cann Group (Aurora owns 23%) and Elixinol Global LTD, among others.

Biotech: This, in our view, will be the next wave of the secular bull market and it happens to be the one area the Street is most dubious about: cannabis as medicine. Imagine the societal surprise when folks find out cannabis is therapeutic and when properly administered, efficacious. We currently own thirteen biotech companies, which include GW Pharmaceuticals and Corbus Pharmaceuticals.

Market Outlook

When adult-use of cannabis becomes legal in Canada on October 17, Canada could be in violation of the U.N. Single Convention on Narcotic Drugs, 1961, and the Convention on Psychotropic Substances, 1971 (which we refer to as the UN Treaties), and as a result, we believe that some of the other countries that are parties to the UN Treaties may refuse to import cannabis from Canada for their own medical use.

Most people we’ve spoken to aren’t aware of this and those who are universally believe a resolution will be reached. However, recent events in Germany and Uruguay are worth watching given that valuations for Canadian licensed producers are largely predicated on international expansion and global distribution.

With the rescheduling of CBD or Epidiolex™ expected by September 23, the expected passage of the Farm Bill in the next few months, and a review of cannabis/THC in December by the U.N. Commission on Narcotic Drugs in advance of the March 2019 U.N. vote on cannabis scheduling under the UN Treaties, we believe that any disruption should prove temporary. It’s also worth noting that Utah and Missouri (for medical) and Michigan and North Dakota (for adult-use) will have legalization on the November ballot.

Despite the surge in large-cap cannabis stocks, many of our holdings have yet to rally. This doesn’t surprise us as nobody on Wall Street follows these stocks and institutions haven’t bought them yet, and we’re content to lay in wait for an efficient market. Canopy Growth is an excellent company, but at the end of August, it was up 500% year-over-year and more than 2000% since 2016. Most of our names haven’t made their move yet—this is by design.

Finally, the U.N. estimates that cannabis currently is a $300 billion annual cash crop. If we contemplate cannabis and hemp as ingredients for the wide array of use-cases and end-products we so often discuss, and expand our lens globally, we’re likely talking about a $2-$3 trillion industry in ten years. The current market capitalization of all publicly traded cannabis securities is roughly $70 billion, so through the lens of simple math, demand should out-pace supply on a forward basis, perhaps quite considerably.

As always, please let us know if you have any questions, and don’t hesitate to contact us to set up a call or a meeting.

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.

todd harrison