[Todd Harrison is the CIO and co-founder of CB1 Capital and a columnist for Investopedia. The views expressed herein are those of the author and do not necessarily reflect the views of Investopedia.]
I went on TV in 2012 and said that cannabis was my single-best investment theme for the next decade.
I had just begun studying the science so I spoke only of the potential economic opportunities and societal benefits: tax revenue, job growth, prison populations and crime rates. Unbeknownst to me at the time, I had entered a rabbit-hole of intellectual curiosity from which I’ve yet to emerge. Efficacy-driven wellness. It was a huge concept but I knew I was early.
Fast-forward six years and many will argue it’s still early, while others are betting that it’s too late.
The former, a large swath of the global population, is tainted by 90 years of misinformation that’s been perpetuated by those benefiting from the status quo, which began with William Randolph Hearst defending his paper empire and continues with big pharma protecting their prescriptions.They view cannabis as a gateway drug or cite moral conflicts and the conversation ends there. We believe many of them will evolve into late-cycle adopters that provide future layers of demand.
And there are those who always got it and continue to get it, although many are where I was six years ago: totally gung-ho on the notion -- true believers -- but operating with an incomplete understanding of the science or application spectrum. They enjoy using cannabis as a social lubricant or they know one-off use-cases such as helping cancer patients with pain and appetite, or as an opioid terminus. Even so, they’re confused as to who is going to smoke all this weed?
What both sides are missing and what we’ve spent the better part of the last decade researching is the underlying science as it pertains to wellness and the dynamic use-case agility of the end-products; which will paradoxically benefit from the same supply glut that cannabis bears are leaning against. Also, tomorrow’s cannabis consumer won’t just smoke it; they’ll drink it, eat it, rub it on, take it as a pill, or wear it as a patch. They’ll take bubble baths in it.
Other cannabis investors we speak with perceive cultivation as a service-station to stoners with some medical stuff on the side, and they model the opportunity as a discretionary vice, such as beer. The short-base in the stock market seems to reflect that sentiment as bearish bets against global cannabis companies have increased to a record $2.1 billion, according to IHS Markit. Those shorts will eventually have to cover, creating yet another layer of forward-demand.
We would agree valuations in the Canadian majors are rich if they were valued as cultivators. But these aren’t farming operations. They are biotech companies in drag, large-scale producers of consumer-packaged goods, or both. They’ll use cannabis and hemp as base-line ingredients for an array of end-products ranging from medicine to cosmetics to pet supplements to plastic composites, and more, and those margins will improve as cannabis prices decline.
The medical community is also behind the curve—just roughly one-in-ten medical schools study the endocannabinoid system (ECS), up from a mere handful last year—largely because cannabis remains schedule I and is off-limits to research. But pioneer scientists already know the cannabinoids found in cannabis are identical-in-action to what our bodies produce, and that a decline in the ECS is probable as we age, which may be responsible for a host of currently unmet medical conditions.
If maintaining endocannabinoid tone becomes increasingly challenging as we age, and scientists have discovered a retrograde pathway to help re-balance our endocannabinoid system, the implications for health and wellness are immense. We remain firmly of the view that cannabinoid wellness is impact investing that will disrupt healthcare and that is not priced into the market.
We’re not waiting around for clinical validation; that will take time and the biotech companies in our portfolio will follow that more traditional FDA pathway. We’re building exposure in companies across geographies and verticals that focus on things like method of delivery and bio-availability. Most of our portfolio holdings aren’t covered by Wall Street nor do they have institutional holders, which is by design.
Given the artificial impediments created by the U.S government, Wall Street and the stock market, which are informed by the medical community, must play catch-up which is rare given both are forward-looking discounting mechanisms. Therein lies the risk and reward of our wellness strategy as we lay-in-wait for an efficient market. We can’t tell you when the proverbial light bulb illuminates above the societal structure but we’ll be well-positioned when it does.
As the cannabis sector continues to work-off last Winter’s excesses, momentum is building behind the scenes. The World Health Organization, in preparing a review for the United Nations, recently cited a “wealth of preclinical literature” that shows cannabinoids “reduce cancer cell proliferation” and inhibit “cancer cell migration and angiogenesis in numerous cancer cell types.” The committee also examined several qualifying conditions, including epilepsy, neuropathic pain, PTSD and sleep disorders, among others.
We’re also waiting on several legislative initiatives at the Federal level, presumably aimed at diffusing cannabis as a Democratic calling-card ahead of the mid-term elections, and we’re expecting the approval of GW Pharmaceuticals’ (GWPH) Epidiolex, which for the first time in history will demonstrate plant-based efficacy that is recognized by the Food and Drug Administration. Congratulations to the team there—true pioneers.
Other upcoming catalysts include the announcement of licenses for Ohio and Massachusetts, the U.N final review of CBD and pre-review of cannabis and cannabis extracts, C-45 in Canada, the Oklahoma medical marijuana vote, the Farm Bill and the New York State report on adult-use.
Our strategy remains overweight US-based operators in anticipation of the legislation with attendant exposure in Canadian LPs, emerging Australian companies with biotech. We’ve been consistent in our view that 2018 would be “back-half loaded” and we believe that pivot is upon us. Lots of risk in the space so please do your work and define your risk; this will have a long tail.
(Disclosure: At the time of writing this article, CB1 Capital Management has a position in GW Pharmaceuticals)