Don’t Confuse Brains With a Bull Market
December was kind to our cannabinoid-wellness thesis and of course, we’re pleased to drive value on behalf of our clients. At the same time, we must acknowledge the froth that surrounds us. Not only are we in the ‘blow-off’ phase of a nine-year bull market—the final phase of market moves is always the most violent—we’re also surrounded by fairy tales from the crypto, which has emboldened investors with digital beer goggles and a concerning sense of infallibility.
The rising tide of enthusiasm lifted cannabis boats as well, including what we refer to as the “FANG” of Canadian cannabis, or “WALA.” That’s Canopy Growth Corporation (WEED.CA), Aphria Corp. (APH.CA), MedReleaf (LEAF.CA) and Aurora (ACB.CA). Those names should continue to benefit as institutions pay a premium for liquidity, if not outright M&A. While we think those are fantastic companies—pioneers, even—we’ve focused our attention down the chain of LPs (licensed producers) where we perceive there to be greater value.
So yes, December was a good month—and a solid five-week start for our long-short wellness strategy—but we’ve been around long enough to know we must remain humble or the market will do it for us. We are versed in the belief that the mechanics of our swing will trump the results of the at-bat, and we’re committed to that process as we embark on what promises to be an interesting and extremely volatile journey.
Despite a cautious eye to the late-stage broader-market signs that surround us—after 28 years, I’ve seen this movie before and I’m pretty sure I know how it ends—we continue to believe we’re in the early stages of a cannabis super-cycle for several reasons; and we’re positioned to reflect that.
We believe in the efficacious agility of cannabinoid wellness—and with upward of 85 FDA clinical trials in motion, we believe the rest of the world will soon see it too. Currently, the few Wall Street analysts who cover the cannabis industry—and most of the medical community and biotech analysts we’ve spoken with—know little to nothing about the endocannabinoid system (ECS).
We think that’s going to change and in a pretty disruptive way. U.S. universities offered this curriculum for the first-time last semester. There’s a reason big pharma and the spirits industry fought so hard to keep cannabis as a Schedule I narcotic; but those genies have been blown out of their bottles the world over, which should accelerate robust M&A consistent with our buy-build thesis. We anticipate that spirits will lead, followed by tobacco, big pharma and ultimately, consumer goods, such as cosmetics, and hemp-based solutions.
Structurally, U.S high net worth investors are still unable to buy most of our stocks through traditional institutions and this is incredibly powerful as a source of future demand. Ditto U.S financial institutions such as mutual funds and public and private pension funds; all barbarians at the gate that will likely chase growth.
We believe the cannabis “trade” will transition as much as almost $300 billion of existing annual demand into a taxable realm and there will be a lot of hands looking to stick a finger into that pie. To wit, the only feasible pathway for the Federal government to participate in this land-grab is through the F.D.A, and we believe cannabis will gradually transition from “drugs from state dispensaries” to “medicine prescribed by doctors and covered by insurance,” indication by indication. Epilepsy should lead, as other rare, currently unmet medical conditions—cancer, Alzheimer’s and autism, to name a few— will hopefully follow.
While we have a fiduciary obligation to our investors to capitalize on this strategy, we would be lying if we said we weren’t equally excited for those who will benefit the most from this emerging wellness disruption: those suffering from conditions where the only option is to stack prescription medications with toxic side-effects.
When folks figure out that 95% of cannabinoids are non-psychoactive and that most of them have some form of therapeutic benefit, we should see a significant migration—if not an outright uprising—that eventually absolves three distinct arbitrages: that of time vs. policy; that of price, before institutions chase growth; and that of perception. Cannabis isn’t about getting high; it’s about getting well.™
With California in the rear-view, New Jersey, Ohio, and Michigan (swing states!) will step into the line of sight; and I imagine New York pols will quickly tire of watching those dollars swim across the river. This jibes with our belief that cannabis will be a hot-button issue for November’s mid-term elections. That would help explain why so many politicians are hopping the fence; re-election is one of the few remaining bipartisan initiatives.
Additional catalysts that we see in the next few quarters include the Canadian Senate acting in mid-February to finalize the regulations for adult recreational use; the NJ adult recreational use announcement expected in Q1, the GW Pharmaceuticals ($GWPH) PDUFA (FDA decision) in June and the opening of recreational use in Massachusetts in early July. All should keep cannabis in the press and top-of-mind throughout 2018, and well beyond.
Chief Investment Officer
CB1 Capital LLC
CB1 Capital has a position in GWPH