Is cannabis the largest investment trend of this generation? Here to tell us why we’re about to see a wave of capital move into the industry is Todd Harrison of CB1 Capital.
Learn more at https://www.cb1cap.com
[00:50] An inside look at CB1 Capital, a New York-based investment manager and advisor that specializes in the supply chain of cannabinoid-based wellness solutions, products, and therapies
[1:13] Todd’s background and how he came to start CB1 Capital
[3:46] How cannabis investing has progressed over the last few years and where Todd sees it heading
[6:30] What Todd is most excited about as an investor in the cannabis industry right now
[7:51] Characteristics that make for a successful MSO or multi-state operator
[10:02] Todd’s thoughts on the federal legislation timeline
[14:05] Why cannabis is the investment opportunity of this generation
[15:53] How the US compares to Canada in terms of cannabis investing opportunities
[17:41] Todd’s advice to investors looking to get into cannabis
[20:27] Who makes up CB1 Capital’s advisory board, from Governor Gary Johnson to Lorne Gertner
[22:03] Why Todd feels we’re about to enter the next stage of cannabis growth and signs to look out for
Matthew Kind: Hi. I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's C-A-N-N-A insider dot com. Now, here's your program
Is cannabis the largest investment trend of this generation? Today's guest is going to tell us how a wall of money is about to move into cannabis. I am pleased to welcome Todd Harrison of CB1 Capital to the show. Todd, welcome to CannaInsider.
Todd Harrison: Hey, Matt. Thank you for having me.
Matthew: Give us a sense of geography. Where are you in the world today?
Todd: We're in Port Washington, New York. About 40 minutes outside of Manhattan, on Long Island.
Matthew: What is CB1 Capital on a high level?
Todd: On a high-level CB1 Capital, we have our wellness fund where we invest in the global cannabis space. Then we have an advisory arm where we help companies, public and private, as well as some hedge funds and ETFs and such, navigate this exciting space.
Matthew: Todd, can you share a little bit about your background and journey and how you got into the cannabis space and started CB1 Capital?
Todd: Sure. My background is in finance. I started in Morgan Stanley. I created derivatives in '91 where I was a VP there. Moved over to the buy-side. I had various roles in Y2K. Went over to Jim Cramer shop. Ran their trillion operation. I became president in 2001 and was down there when the planes hit and the towers fell. That was really, I think the pivot unbeknownst at the time for me into cannabis because seeing the people holding hands and jumping and running from the smoke and all that, I had the wherewithal.
They put me to go talk to somebody and that somebody was Dr. Julie Holland, who as it turns out was, and is quite the expert on cannabis and really alternative therapies in general. This was back several years after 9/11. Still, I would confide in her that I was drawn to cannabis to help with the anxiety and would sleep and I was feeling guilty about that. She asked, "Why?" I told her, "Well, this is your brain on drugs, and I've learned it from watching your dad and all that." She turned me onto the science. She opened that door, that rabbit hole, if you will, for the intellectually curious.
Studied the history and the weaponization of this plant as an immigration tool, studied the science and really the endocannabinoid system and its role in regulating neurotransmissions and that retrograde pathway to wellness. Then really what a natural global free market looks like and the artificial impediments that were in the way of this moving into a taxable ground. That really began the journey that ultimately led to CB1 Capital taking shape. My partner, Loren DeFalco has experience in studying the endocannabinoid system for over a decade now.
We surrounded ourselves with who we think are really some of the best minds in cannabinoid wellness. As much as we're sitting here at the precipice of Cannabis 2.0, we really are weighing in ways for Cannabis 3.0 and certainly, the wellness attributes that are going to come out the other side of that biotech pathway.
Matthew: Todd, can you paint a picture of where you think the cannabis, where we are in this cannabis investing story now?
Todd: Yes. I think the short answer is that we're in the eye of the perfect storm. I say that after this space is rallied, had a pretty significant rally year-over-year before this latest call of four months consolidation. You take a step back with Cannabis 1.0, which is that community and cultivation story and how that was the bubble and bust of 2018. From January 2018 to March of last year, the global cannabis index that Bloomberg has, was down 92%. That was before the pandemic arrived, of course. It was a real existential moment for this space. It could have gone either way.
There was no access to capital. Persian, which is a large custodian, had pulled the plug on all things cannabis, and everybody could only sell, similar now to what we're seeing on a different level, which I'll get to, but at the time, there was really no visibility. As the virus took shape, cannabis was deemed essential. I think as the breadth and the depth of the pandemic began to self-actuate, cannabis, as a solution began to take hold, cannabis as a wellness supplement for anxiety and sleep began to take hold. Certainly, cannabis as a tax driver and employment engine in a post-pandemic world began to take hold.
That was really the, in our view, March of 2020, was that cyclical bottom within a secular bull market and certainly as Black Lives Matter in that social justice piece evolved over the course of the last year as we referred to as the slow-motion, perfect storm for cannabis, continuing into the elections with the five states sweep, both red and blue and ultimately with Schumer come January.
Although certainly I think a lot of people are frustrated right now, but through our lens, we are sitting right at the cusp of 2.0, and that'll be really triggered by that institutional adoption. It's going to require some changes to the current construct to allow investors to access these names. I think that's where we are right now, but as a statewide story, this will continue to manifest over the next couple of years.
Matthew: Are there any particular pieces of the cannabis ecosystem that you're most excited about as an investor?
Todd: I think right now the MSOs are, I think that's where you want to be. We try to poke holes in a lot of our own bullish thesis here as the plumbing for the marketplace right now is so convoluted. Obviously, I think as your audience knows or should know, you can't buy US cannabis on US exchanges. You have to go to the Pink Sheet, you have to go to the CSE, both garbage exchanges and by and large, institutions. Most retail investors, US retail investors can access these securities, if they even know the difference between US and Canadian cannabis companies.
We think that's an opportunity. We think that as these walls fall over time, and we do believe that's going to be an incremental process, these arbitragers will re-rate, these equities will re-rate. You'll see some more appropriate multiples on these securities versus right now, they're really being choked off from investors. We could debate why that is, but I think it's transitory.
Matthew: With the MSOs or multi-state operators, how do you evaluate which ones are better than others?
Todd: Well, it's a good question. I think generally, we look at it and say, there is the FANG, if you will, those four horsemen, five horsemen, five [unintelligible [00:08:14] FANG, if you will, that are emerging. Then you have the back of that totem pole or the second and third-tier guys that probably have more leverage to something like safe banking or some of these other incremental legislative initiatives that we think are going to come through the pipe. Certainly, I think the conventional wisdom would look at names like GreenThumb, and Curaleaf, and True Leaf, Cresco, TerrAscend.
Maybe throw Verano in there because they've got the scale, maybe not the operating history. Then as you start to move down, there are some really good companies. I think I said Cresco, but the forefronts of the world, the gauges of the world, these are good companies, largely operating in this inefficient market right now with a very limited investor pool. You have a lot of these arbitrage is if you will, valuation arbitrages and also regulatory arbitrages that are weighing in weight. None of which, to be honest, we're really depending on right now. We think that slow and steady wins the race. As my friend, Jason Wilde says, "You can pay us now or pay us more later."
The longer you have these artificial walls around cannabis, the more traction these companies are going to get in their home states, building these brands, building those footprints, building the scale of the company and the enterprise value of the company for when that buy-build eventually arrives, when CPG and the rest of them come to participate in the space. All of that's in front of us. It really is, it's a fascinating space right now, but it's not without its impediments.
Matthew: What if anything do you think it's going to happen from a federal legislation point of view?
Todd: Well, as we sit here, what is it, June 15th?
Todd: I think the market's told you now that there's going to be no sweeping federal change. I think the market trading, where it was in January I mean, literally to the tick as I'm sitting here talking with you, to where it closed the night before Schumer won the Senate majority leadership and the Democrats took the Senate. All of the expectations for federal movement through all lands have been removed.
Still, we expect incremental progress. Our way to sort of intel is that Schumer's going to attach safe plus to some must-pass legislation this fall, because as the Senate Majority Leader, he may wish to have sweeping reform. Aside from the fact that he doesn't have 50, much less 60 votes for that, he's also the senator from New York and New York is fully legal, New York has social justice programs that are coming out of the gate and the senator from New York knows that there can be no social justice without functional banking. I think that light bulb went off over the Senate in the last however many weeks that they're going to need to piecemeal this.
I think that is the best-case scenario for the MSOs and the existing operators, not the best case for all of the people who are sitting in jail for doing the things that we're getting paid to do which is a travesty. There's a lot of different moving parts here, of course, criminal justice. There's talk about moving us to a Schedule 2 versus taking it off to CSA but even moving it to a Schedule 2, it doesn't lend itself to any meaningful broad-based criminal reform.
You have to take this off of their controlled substance act and circle it like you have for cigarettes or like you have for alcohol. You leave it to the states and the other criminal justice component and then you have the social equity component at the state level. That's out ultimately with the state's rights being protected. Eventually, over time, I then will have visibility on it, interstate commerce which will shift the dynamics and certainly change some of the economics but I think by the time that all plays through, you're going to have a much larger investing universe involved with these stocks.
Matthew: How is the huge cannabis brand like the size of a CocaCola or as iconic as a CocaCola going to break through into this market when they're all essentially in state fiefdoms in a way? Is that possible? How do you see that evolving?
Todd: It's a great question. Ultimately, brands are going to be where it goes. I think everybody knows that although nobody really has a good sense on how we get there. Right now, we could argue Cookies is the best or only brand in cannabis. They do that in an interesting piecemeal way but one that certainly works but can help demonstrate what that model might look like.
I think for the first phase of adoption, honestly we more envisioned people experimenting, looking for the best quality at the lowest cost, and that helping to inform their decisions and drive those brands. Obviously, you see what Ben's doing at Green Thumb with Snoozeberry, with Dogwalkers. Things like that I think are models of what you look for in building brands.
Matthew: Do you think cannabis is the investing opportunity of this generation?
Todd: I'm pretty much betting my entire life, reputation, and all of my money on it so I sure should hope so, my friend.
Matthew: [laughs] Right. You might need a Dogwalker if it doesn't pan up.
Todd: I might need a dog because I'll have sold mine. The point is there's not many times in your life. I left after 9/11, I left Wall Street, I started a media company, it went down. I know all about the markets and helping people make better and more informed decision. During that time, I was studying and I was researching. I was fascinated by cannabis and the application agility that's going to come out of the back on the other side of these clinical trials.
We're still so early. There's still people out there that think that cannabis is more likely to cause cancer than to help solve for it. All of that is that comes through is going to illuminate the consumer curve. I think as we look back, there's only two sides of history and there's only one right side here. This plant has a 30,000 year or some odd relationship with the earth, with 10,000 years as a wellness supplement across societies, across cultures.
This prohibition, this man-made prohibition that ignored the efficacy, that ignored the wellness, that incarcerated so many people of color, it's a black stain on the soul of this country and I think it's over. It's just a matter of how it unwinds, how it plays out but cannabis is the earth's medicine. It is one of the earth's blessings and it's been villanized and weaponized and that's all coming to an end now. That's exciting.
Matthew: How do you feel Canada compares and contrasts to the US in terms of investment opportunities?
Todd: Listen, there's lots going on right now, discussions across I guess, the exchanges we can talk a little bit about another TSX's having conversations were told. Ultimately, it's going to come down to how that footprint matriculates. I think the current rate and pace all things being equal, the NSO, the big boys are more likely to turn around buy Canadian LP when they want exposure, if they even want to do that or go out and build it themselves as opposed to being able to, some of these guys that don't have the backing of a constellation or Altria are going to be able to afford the MSOs.
Every new state that comes on is like another Canada. I mean, you think about next year if Connecticut, if the special session goes through, you have the entire tristate area coming on board next year. That's a pretty big deal.
Then the year after, you're probably talking Maryland, Pennsylvania. The year after that, maybe Ohio and Florida. You can move around the states, you can move around the dates but they're all coming. They all need the money. As we research this plant and in itself avails what those of us who have been touched by the efficacy will so passionately tell you, that we're in the early stages of a multiyear circulable market. Painful for the last four months but you know what, Green Thumb went up 900%, take a third off the top over four months but chop around frustrate people. I can argue that's healthy even though it doesn't feel healthy as I'm sitting here talking to you.
Matthew: For people that are in other industries with skill sets and they want to bring them into the cannabis industry, who do you think is the best candidates to come in and add value?
Todd: Wow, it's a good question. I don't know if I have an easy answer. What I can tell you is I tell people who ask me about this and they say, well, I have no experience. I say, well, really nobody has experience. On a relative basis, if you go forth and study the science, keep in mind the endocannabinoid system was first discovered in the early '90s, it wasn't taught in medical school, still even not taught in many medical schools. The parallels between the people and the plant and endocannabinoid systems that cannabinoids found in cannabis still very much frontier science. Just now starting over the last couple of years to be taught at universities.
I have twin 17-year-olds, they don't listen to me, they don't get it, but I tell them and say if you want to never really worry about having a job, follow the science, learn about the ECS and cannabis, and there's that side. If 1.0 was about cultivation and 2.0 is about CPG and cannabis as ingredients. You think about the use cases, the end products, and the agility of the end products. Whether it's from nutraceuticals and beverages and the social lubricants side of the equation or the wellness supplements, the pet supplements, the cosmetics in vanity, the hemp use cases across biofuel and hemp cream, and plastic composites, it's going to be ubiquitous.
I tell you that and answer to your question because I do think that there's going to be a genuine need for an educated labor force across the entire spectrum. I do think this is going to be one of those things that we look back just like prohibition was repealed coming out of the Great Depression, I think the modern Great Depression or the COVID is going to see a modern-day sequel of that story, history lines. That's what we're seeing at the state level. I think the biggest possible risk is the FDA, Schumer knows that. I don't think that sees the light of day during this Congress, and I think by the next Congress, you already have the tri-state area onboard and billions and billions in tax revenues and upwards to a million jobs making it a different discussion versus the CBD story with the FDA.
Matthew: Tell us about your advisory board. You've got some heavy hitters on there.
Todd: I mean, if there's a Mount Rushmore for cannabis wellness, it's these guys and girls. Dr. Ethan Russo, Dr. Julie Holland, Dr. Jeffrey Chen, I mean, these are pioneers in the space and good at what they do, better at who they are. Governor Gary Johnson, Lorne Gertner, one of the founders of Cronos and the godfather of Canadian cannabis as he's called, we have a good team. I think beyond that, as we look around our ecosystem, we've found ourselves good partners, we know all the funds in the space, we all talk to each other, we know the analyst community, we know the management teams. I mean, the good news is that we have, right now, this is a pretty close-knit cottage community.
I think what a lot of people who miss this sit here and commiserate because I see retail on Twitter complaining about the price actioning and I listened to the smartest small-cap growth managers in the world complaining that they can't order these names. I think by the time we get to where we're going to go, this cottage industry will be industrial complex and it's just going to be different. I still think this is the easy trade. It doesn't feel like it when these things are moving 20%, 30% any given direction, but it's still the easy trade because once the institutions are on board, it's just going to get a lot harder and it's going to be a lot different.
Matthew: Will there be any signs that you feel like we're about to enter the next stage of huge growth? Is that something-- Go ahead tell us what those would be.
Todd: Just trading volumes, we'll see them.
Matthew: Trading volumes? Is the cash coming in?
Todd: Yes, I mean, I sit here and I stare at the screens, I stare at the volume because volume qualifies price, I've been trading over 30 years. The reason we are 90% in publicly traded securities is because there is zero doubt in our minds that once institutions adopt this space, they're all going to articulate those strategies through publicly traded securities just as they always have and they're going to want their monthly [unintelligible [00:22:46], they're going to want the reporting, the whole nine.
The problem with the space right now is not the business, business is great and getting better, the total addressable market is getting bigger, new states are coming on every year, even every month, a couple of months now. The issue is the queering and the custodian. I mentioned earlier, Parsian had pulled the plug at the end of 2019, really driving the knife into the back of this space, right into the pandemic, and more recently, Bank of America, Merrill Lynch, CS First Boston. There's a whole handful of them, UBS.
A lot of them were never very cannabis-friendly like BAML told us a year and a half ago, I guess they sent the memo around last week that freaked people out, but the reality is this is a plumbing issue, whatever the agenda is, whatever the, follow the money.
Listen, I've been doing this a long time. These are unnatural price movements for cannabis because they're not in a free market because they have no access, they're cutting access off to the participants. If this was happening already to Wall Street bets, there'd be a revolution, because it's happening on the CSC for a handful of investors, I don't think a lot of people are paying attention, but it's not going to last forever, put it that way. These companies are trading at really attractive multiples with really exciting growth trajectories in front of them. Again, we look at it as an opportunity.
Matthew: Yes, the kind of finance and cannabis are these emerging trends in FinTech. Wall Street's getting rewired in a way. When you look at it from a 10,000-foot view, you see FinTech and crypto and blockchain, how do you see that changing the old guard or the old way of doing things and bringing in a new?
Todd: I mean, listen, disruptive tech is [unintelligible [00:24:49]. I think blockchain is brilliant. I'm a no coiner, I say that without vice or virtue, because I don't know it. I can't tell you the difference between coins and, to be honest, I've been staring at cannabis for so long my eyes are green, but the truth is, this up and coming generation, they're all cannabis-friendly, all of the opposition for cannabis has been a demographic thing for the last decade has been aging out.
You have 92% of the country agreeing that there should be some sort of legal cannabis and 92% of the country doesn't rule out anything, it doesn't agree on anything, and then you have this whole younger generation that is looking to go green and stick it to the man and the industrial complex. I mean, cannabis just checks so many different boxes plus the fact it's good for you.
I think that's the part that most people are going to get a little bit whacked out on when they realize that this isn't about vice, it's not about getting high, it's about getting well. This is really about a therapeutic response to a lot of the unmet medical conditions that are out there because we haven't been able to regulate neurotransmissions as a matter of course, I think that's going to change as 3.0 takes shape, and that's exciting. It's going to take time and markets are very, as you know, ADD, immediate gratification, pay me now, and policy takes time. You have a duration mismatch when you have 99.9% retail universe trading these stocks, it tends to be a very emotional bunch.
Matthew: Todd, I'd like to ask you a few personal development questions to get a sense of who you are personally. Is there a book that's had a big impact on your way of life or thinking that you'd like to share or you recommend often?
Todd: I think Man's Search for Meaning by Viktor Frankl is the most powerful book I've ever read. I've read it a few times. I would say if I had to pick one, that would probably be the book, yes.
Matthew: I want to hear your thoughts on whether you think New York is going to rebound as the same city it was pre-COVID-19, or if it's going to change, how you think it might change.
Todd: New York always bounces back. It bounced back after 9/11, it bounced back after the great financial crisis, it will bounce back again, and will be different. I think generally, as a matter of course, there's going to be a demographic shift to the suburbs and the country, and I think that COVID helped to, obviously, crystallize that. We've seen the outsize real estate movement in the suburbs.
Certainly, a lot of unintended consequences of policy are certainly going to manifest in ways and I'm not smart enough to know, but I will tell you, if you could find companies that you believe are going to continue to demonstrate solid growth with good management teams and they're priced attractive, follow the fundamentals, right? In the short term, you have all these guys, all these traders voting on wherever this chart pattern is on, in the smallest and nearest time horizon. Over the long term, the market's going to weigh companies with good fundamentals and reward them with growth and that's where I think we are.
Matthew: Last question, Todd, what's your favorite unhealthy comfort food?
Todd: It's really just like asking me who my favorite child is, there's a lot. Anything chocolate, dark chocolate. Yes, that's my go-to.
Matthew: Well, Todd, thanks so much for coming on the show and educating us about the investment world, really appreciate it. As we close, how can listeners find out more about you and CB1 Capital?
Todd: See it at www.cb1cap.com, Charlie, Boy, the number one, Cap. You could sign up for our free daily recap. I have a Substack, Todd Harrison, and I'm on Twitter Todd_Harrison. It's not hard to find me, but if you find me, hopefully, we can make some money together.
Matthew: Great. Todd, thanks again.
Todd: Yes, sure. Thank you so much.
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