Survive and Thrive
The first quarter of 2018 is in the books, and what a quarter it was. After years of steady stock market gains, volatility exploded across asset classes. I’ve traded through several volatile stretches – Long-Term Capital Management, the Asian Contagion, Y2K (both ways) and of course, the 2007-2009 global financial crisis – and these last few months reminded me of those markets.
The Global Cannabis Stock Market Index was down more than 24% in Q1 2018 and many stocks in the space fared far worse. Again, with no institutional presence to buffer the decline or defend the story, prices were determined by retail holders as risk migrated from crypto to cannabis to tech stocks, as demonstrated by the following chart:
As brutal as the price action was, it shook some of the froth from the heretofore high-fliers, which pulled some of these stocks back toward levels we consider attractive through a longer-term lens. Insofar as our strategy is to remain long the cannabinoid wellness complex and hedge via defined-risk non-correlated exposure, we’re seeking to eliminate the most substantial risk to our strategy – that of a watershed decline in the equity markets. While we hope that the bull market continues and risk appetites expand, we’re not willing to bet the farm on it at this stage of the cycle.
Instead, we’re positioned with what is known on the street as a “married put,” or a “bullet,” which is long stock and long puts (and put spreads to offset volatility skews). This is designed to provide downside protection while allowing us to remain invested across geographies and verticals consistent with our thesis. When popular perception shifts from viewing cannabis as a discretionary vice to understanding that it’s efficacy-led healthcare disruption, we expect to capture that performance in kind.
There are a few upcoming catalysts of which we know, including the April 19 half-day meeting between GW Pharmaceuticals and the FDA ahead of the upcoming Epidiolex PDUFA in late June. While it remains to be seen what will be rescheduled (CBD vs. cannabis), the significance of the event cannot be understated: it will be the first time a cannabinoid-based botanical compound will be approved by the US FDA.
Closer to home, we look forward to further clarity regarding banking regulations as states continue to come online. Given the steadfast pressure on US-based operations, we believe a meaningful discount has emerged that should reward proactive and patient investors. Ianthus Capital, Liberty Health Sciences, Terra Tech and MPXEF Bioceutical Corporation are four of our current holdings that we believe should benefit.
Finally, given the ongoing rhetoric regarding a trade war, we started Q2 rebalancing our currency exposure across the United States, Australia and Canada. This is consistent with our intention to mitigate risk that we can’t control and focus on the companies and strategies that will reward our investors prospectively. We believe we own those stocks and we’re waiting for others to discover what we already know.
As always, please let us know if you have any questions or comments, and thanks as always for your continued support.
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.