The April Pivot

By Todd Harrison |
May 23, 2018


“This time is different” may be the four most dangerous words in finance, but we found ourselves repeating them quite often last year. We did so in response to persistent questions about when the U.S. government would change their archaic, if not cruel, assessment of the cannabis plant to allow for testing, growth and in-state commerce without fear of Federal prosecution.

We believe 2018 is indeed different as it’s an election year and, according to an April 2018 Quinnipiac University Poll, 93% of the constituency supports medical cannabis. We’ve watched various members of the GOP gradually shift their stance; Orrin Hatch last fall and more meaningfully, Mitch McConnell, John Boehner and Donald Trump in April. They’ve done this to remove cannabis as a Democratic calling card come November and truth be told, we think it’s smart politics. The people have spoken and they’re demanding change.

Dr. Sanjay Gupta hosted a CNN Special Report at the end of the month, Pot vs. Pills, which highlighted much of the science that is the backbone of our investment thesis. While epilepsy is the breakthrough indication that clinically demonstrates efficacy (GW Pharmaceuticals received a 13‑0 approval vote and a standing ovation from the FDA Expert Review Panel mid-month), the opioid epidemic has catalyzed the conversation as a matter of life and death.

Indeed, according to a study published by the Journal of the American Medical Association in JAMA Internal Medicine, there has been a 25% decrease in opioid-related deaths in states with legal medical marijuana. One-in-four, which is meaningful given that 115 Americans die every day from opioid overdoses, more than from car accidents, breast cancer, or guns; and more than 2.5 million Americans are currently struggling with opioid addiction. New studies indicate that cannabis is not only an opioid terminus but is also helpful in managing addiction itself.

The combination of voter demand, political will and medical need seemingly suggests that change is on the horizon, and soon. Given how fluid the situation is, our strategy is focused less on the actual timing and more on identifying the companies that we believe will benefit as perception and capital flows shift. The institutional investment process will take time as Wall Street analysts, and the world at large, must educates themselves on the science, which is why we’ve approached this with a five to ten year investment horizon.

We got the whiff of M&A toward the end of the month as rumors of talks between Canadian major Aurora Cannabis Inc. and The Cann Group of Australia was leaked to the press. Our strategy owns Cann Group and several other operators down under as we believe the Australian industry is a few years behind Canada and we expect the growth curve to play out similarly. We find ourselves increasingly excited by our biopharmaceutical exposure and have begun to look through the cultivation cycle to consumer-packaged goods, where price deflation should reduce input costs across multiple verticals.

 

CB1 Capital Management holds CAN.AU. 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.

2018-05-23T11:42:00+00:00