A Matter of Trust
Industry Overview: Hurdles and Opportunities
The past several months has been an arduous journey for the cannabis complex. Between the elevated Canadian valuations, the pace of DOJ reviews of U.S merger activities, the duration risk inherent in the clinical trials, and the uncertainty surrounding the FDA stance on CBD-derived hemp, there was ample cause for pause this summer.
The industry was further pressured when CannTrust, a NYSE-listed Canadian-based licensed producer, committed what are being categorized as a series of improprieties, including shipping product from unlicensed grow rooms, allegations of insider trading and a complete breakdown in corporate governance; the stock lost more than half its value in a matter of days.
While we had no CannTrust position—we sold the stock in the Spring when we began to rotate away from our Canadian exposure— the ensuing sentiment drove the BI Global Cannabis Competitive Peers Index to a 15% loss for the month, and lower for the year, as it revisited last December’s lows. The global cannabis proxy ended July 47% below October levels, per the chart below.
As we continue to eschew Canada—valuations remain expensive and asset write-downs are likely—we perceive the other issues mentioned as transient, akin to growing pains. Channel checks indicate the DOJ process is borne from a genuine desire to better understand sector nuances. We believe States will set their own CBD guidelines, as they have for cannabis, until the FDA defines policy. And we’ll follow the science through the FDA trials, which is the aspect of our strategy that excites us most.
The landscape is treacherous, and we continued best efforts to use price to our advantage. In July, we reduced our cost bases in select MSOs, including Green Thumb Industries, Ianthus Capital Holdings, and Vireo Health International, added CannaRoyalty Corp (DBA Origin House) and Harvest Health & Recreation back to the portfolio, and accumulated select Latin American exposure ahead of expected fourth-quarter catalysts.
While D.C politics moves slower than real-time risk, this Congress has been characterized as the most cannabis-friendly in history. The conversations have shifted from “if” to “when” and “how”, bolstering the likelihood that our thesis will significantly de-risk over the next 12-18 months as the artificial impediments to a normalized business cycle are removed.
The Senate Banking Committee Chair, Senator Mike Crapo held an unexpected hearing in July to discuss the current state of banking legislation for the cannabis industry. The meeting had not been anticipated by political analysts or industry watchers, nor was it opposed by the GOP. Our current expectation is that banking reform will be the first legislation to pass both houses.
The SAFE Act would allow banks to provide financial services and debt financing to cannabis companies operating in compliance with State laws, allowing for a much-needed reduction in their cost of capital. While this legislation won’t specifically solve the custody and clearing issues for large institutions to buy U.S-domiciled operations, we believe incremental solutions will emerge as broader decriminalization evolves.
Our Global Wellness Strategy
Given the nature of frontier markets and the many crosscurrents and catalysts, the need for active management has crystallized. Several sector ETF’s have emerged, but their holdings are remarkably alike: heavy on Canadian exposure and for the most part, devoid of the U.S companies that we believe offer the most compelling valuations and the best risk / reward.
While the recent headlines and resulting price action has been negative, this complex is seasonal and cyclical, and news is always worst near the lows. Our anticipated catalysts and regulatory arbitrages are on the horizon, and we remain steadfast in our belief that we will be rewarded with our strategy.
As always, please don’t hesitate to contact us with any questions.
With kind regards,
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.