Cannabis’ Cruel Summer

It was a cruel summer for the cannabis complex. Between high-profile struggles in Canada, delays in several states and the lack of clarity surrounding hemp, retail investors (who comprise a significant portion of the shareholder base) have fled the sector in droves. Factor in the early investors and insiders who’ve used newly listed public stocks as their personal ATMs, while remembering that institutions remain largely sidelined by federal law, and well, here we are.

The BI Global Cannabis Competitive Peers Index lost 14% in August for a cumulative loss of 44% since the Spring, 55% since October and a staggering 71% since January 2018. This equal-weighted basket of stocks represents the global cannabis universe, while the carnage in many names was worse.

BI Global Cannabis Competitive Peers Index

BI Global Cannabis Competitive Peers Index

If this price action feels oddly familiar, it’s because we’ve seen this movie before. From our perch, the parallels between the current cannabis landscape and the tech markets around the turn of the century continue apace. Both junctures saw an abundance of capital chasing a shiny new sector before market dynamics violently shifted from “tell me” to “show me!”

The NASDAQ, for its part, lost 78% between 2000 and 2002 before starting a seventeen-year bull market that witnessed a nine-fold increase in value. We’re not saying history will repeat itself, but considering how far the cannabis industry has come despite international treaties and federal laws working against it, it won’t surprise us when regulatory reform and clinical results make it rhyme, with time.

NASDAQ 1997-2002

NASDAQ 1997-2002

If Canadian cultivation was cannabis 1.0, we expect the U.S.-led CPG (consumer packaged goods) story to manifest as the next phase of the secular bull market, with sustainable industrial end-products (hempcrete, plastic composites, bio-fuels, etc.) and efficacy-driven solutions (cannabis biotech / biosynthetics) on tap.

Similar to FANG’s leadership in the tech sector, the four horsemen of U.S. cannabis, at this early stage, are Curaleaf Holdings, Cresco Labs, Green Thumb Industries and Harvest Health & Recreation, with a litany of second- and third-tier players behind them. Curaleaf guided to $1 billion in sales and positive net income next year and other players are on target to demonstrate similar trajectories. In a world of negative interest rates, we believe this type of growth will be well-received, if not embraced.

On the other side of the U.S.-investing barbell, we’re buying growth assets at value multiples and in some cases, at distressed levels. One case in point is Vireo Health, which owns licenses in Minnesota, New York and ten other states. The stock lost ~ 80% since April—just a staggering number—and by the end of the summer, was valued below the intrinsic value of the company’s operating licenses.

While liquidity concerns will continue to plague the sector until the plumbing improves–which is why banking reform and ultimately, the ability for institutions to custody publicly traded securities would be such massive catalysts for the space—fundamentals will drive performance over time and we expect more favorable catalysts over the next eighteen months, including pending domestic M&A activity, the UN rescheduling vote (slated for the spring) and the 2020 U.S. general election cycle.

The summer of 2019 saw the third 45% drawdown for global cannabis in the last two years and that’s a lot of volatility, even for the hard and true among us. During the dog days of summer, particularly toward the end, we were told that risk managers were forcing traders to liquidate their holdings and swearing off the sector once and for all. Those stretches are never fun, but capitulation is as tried and true as the markets themselves, as is what comes next.

Seaport Global analyst Brett Hundley, in a research note to clients last month, wrote, “Within the next two years, we think that the trillions of dollars under management in the US will not only have access to cannabis as an investment but may very well seek the industry out within what could be a volatile macro environment.” We concur and continue to position accordingly.

As always, please don’t hesitate to contact us with any thoughts or questions. With kind regards,

Todd Harrison

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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todd harrison