Editors’ Note: This is the transcript version of the podcast we posted on September 21. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast embedded below, if you need any clarification. Enjoy!
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Rena Sherbill: Hi again, everybody. Welcome back to the show. It’s great to have you listening with us. I’m on the other side of the world than I was last episode. I’m back in Tel Aviv, but the next couple of weeks, we’re bringing you the conversations I had at the Benzinga Capital Cannabis Conference in Chicago.
It was truly a fantastic event, if you’re in the cannabis industry, if you’re interested in it, if you’re invested in it, if you’re thinking about being invested in it, look up their conferences. I believe the next one is in Miami in the spring. The next one in Chicago. I would attend any Benzinga Conference. I’ve been to a couple and that’s a really great one.
So, today, I’m bringing you my conversation with Tim, which was the last conversation I had at the conference before the end of it. He had come that day from a keynote panel that he did with Boris Jordan, Chairman at Curaleaf (OTCPK:CURLF), who had some things to say, as you know, he did about beverages, about the state of the industry.
Tim is one of our favorite guests because he tells it like it is. He talks on CNBC’s fast money. He’s the host of that. He also runs the ETF NYSEARCA:CNBS, which he talks about today. And in general, has a lot of insight based on his strong relationships and strong insight into the cannabis industry. He shares them with us today as he has done a few times. Always appreciate him coming on. Hope you enjoy this conversation.
Tim, welcome back to the Cannabis Investing Podcast live and in-person. Yes.
Tim Seymour: Right on. Great to be here. And great to be at what’s been a full couple days of cannabis conversations I’m sure for you and for me. So, it’s been great.
RS: I agree. What would you say is your biggest takeaway from the conference or just like the beauty of networking or something salient that you took away?
TS: So, I feel like there’s a constructive pessimism here. And constructive pessimism, so from – for investors out there, if you think about, like, you know, how people think about just traders’ mentality and sentiment is that often when things get really dark is a good opportunity to be buying.
I think this industry at times has been a little bit of its own echo chamber. And we, you know, we all recognize the exciting elements about the cannabis industry, even just think of pure economics and investment, but the macro, the addressable market growth, potentially high margin high growth businesses, but then ultimately, some of that, you know, I think, has been tempered and people recognize what the opportunity is.
People recognize that, like, the good and the bad of the addressable market is that that right now probably including adult medical and, you know, just alone, whatever that number is, 40 billion, I don’t know, you know, there’s a lot of throwing darts of that, but immediately, the illicit market is another 40, right? And that’s the bad news. Like, the illicit market is been, you know, it should be one of the big topics of conversation because, especially in states like New York, I live in New York City, the illicit markets run a while.
So, to summarize, I think, you know, the industry is determined. The best conversations are people that understand that that this is a really complex industry where there’s some of the complexities that exist in other industries that are consumer packaged goods industries and growing a brand and all this and all the things that are going on right now around digital and loyalty and software. And, like, all the complexity of all this stuff and then all just the dynamics of this is still, kind of a commodity industry.
Everybody talks about brands and why that insulates their margin, but, you know, the dynamics of stuff that’s just a supply and demand. Too much supply coming on, and so, really complex. And so, for companies that don’t have access to capital, and at a time when global markets are under a lot of stress, let’s just say, it just makes for a sober reality of this is exciting, this is great, but this is going to be hard and people are going to go out of business. And so that’s what I take away, is that people are not as optimistic.
And I think that that’s good, but the people that I’m talking to that I think are doing a good job or whether they be companies and operators or whether they be people that are lending into the industry, just spoken to a lot of debt guys. I feel like that’s bullish, you know, and debt guys that do equipment financing and understand the metrics they need to be looking at. So, anyway, a lot going on here, but my takeaways are the industry’s growing on.
RS: Yeah. It’s a good way of putting it. I mean, I was thinking of like, you know, classic dysfunctional family, like, as it grows up, it’s getting more, you know, it’s kind of the pieces are connecting more, but there’s still some, like, dysfunction of its core.
TS: Well, we understand our dysfunction, right?
RS: Yeah. Which is half the battle.
TS: I think so. We’re truly being honest. And I think addressing, everybody’s got their stuff, so keep the metaphor going. I mean, if, you know, understanding the weaknesses and certain inclinations of people in your family and how they’re going to react and having a foresight now to actually be able to adjust and adapt. So, I think we’re adjusting and adapting. And I think we are growing up. And I think it’s, you know, those teenage and adolescent years are not going to be easy.
RS: Right. Right. Right. I mean, to extend the metaphor, if we can push it even further…
TS: Yes, we can.
RS: One of the things I’ve been struck by is the community, and I know this sounds like trade and perhaps empty platitudes, but I really was struck by how every C-suite executive that I talked to or that I heard on panel is in touch with his competitors or her competitors. And it’s, even if you’re talking about, you know, lower scale than the C-suite, everybody’s really sharing information, which I don’t know if it’s obvious or not, but I am struck by the fact that we don’t have to be sharing, it does push us all forward, but at the same time, there isn’t this kind of, I’m going to win while you guys stay behind. There is a, sort of sharing of knowledge, [mindshare] [ph], how we got here. Would you agree with that?
TS: I would. And I also think that the companies in some sense aren’t really competing with each other. They’re competing with the illicit market. They’re competing with the environment. They’re competing with the legislative constraints. They’re competing with the lack of capital. I think everybody’s competing for the consumer, but I think they would all kind of recognize that again, the brands that are being built are not even anywhere close to being established on some level that the brand that is Cresco Labs (OTCQX:CRLBF), Riverside Dispensary. People know Cresco Labs. And the Curaleaf sign up front in a Curaleaf Dispensary, that’s the brand, the brands themselves underlying are slowly getting there.
The fact that it is good business to actually be a partner in many of these cases because either you want different products on your shelf, you want to diversify, some folks have more of a wholesale exposure than others, and some folks have more of a retail exposure, but if you think about the biggest MSOs on some level, they should all be aligned in the conversation I had with Boris Jordan this morning, which was, first of all, do you think that the industry is speaking with the same voice? Do you think you’re all pulling oars together as it relates to the federal agenda that the industry has, and I think mostly that is a sense that we’re all in this together.
So, it is interesting, and I do believe that there’s an element of the people that are involved in this industry have some sense of conscience on what they’re doing. And I know that sounds, you know, is that right? Is that silly? Is it just like, who are you kidding? You know, people are here to make money. And people are here to build businesses and that that can be ruthless, but I think people made choices along the ways to be doing this and that’s what feels good. This this is a – it’s a more fun event than you’re going to find at a, like, a real estate convention.
RS: More fun and also, I feel the same way in terms of, like, the leaders coming in with, you know, you look at a company, well, why is it doing this? Why is it doing It’s the strategy. It’s also what the leader believes in. And I do feel like there is something to the shared experience of leading cannabis company. It’s unique. That’s why it’s special. That’s why it’s not like real estate. There’s a lot of more hoops you have to jump through.
TS: For sure.
RS: Speaking of your conversation with Boris Jordan, I thought was really insightful. There were two things that struck me most. The first thing was when he was talking about, kind of the longer timeline of investing. Yeah. Playing the long game and what bankers and what the money people are looking for is what your plan is going to be in two years, not how you [indiscernible] up last year or how your acquisition is going to fold into your actual company in the, you know, it’s the foresight and I think that’s something we talk a lot about on the podcast is, it’s really crappy environment right now, not just for cannabis, but certainly for cannabis, but that does change. Things will change. Things will improve. And why does it matter to get in now? What would you say to, kind of Boris’ point about that? And how does that integrate with your thinking about it?
TS: Right. And yesterday, I did my Fast Money daily 5:00 P.M. show, 4:00 P.M. Central Time here, and I did it by the river, and it was really interesting, but I’d bring that up just to say, mark was down 5% yesterday. 5% for the Nasdaq and 4.5% for the S&P, and on some level, Cannabis is, you know, in here, it was kind of a vacuum. And it was a little surreal because it’s like, guys, by the way, you know, markets are melting down. This isn’t going to work for this asset class either. And when I think about what investors that are tuning into Seeking Alpha for broader markets’ flavor and insights in addition to what they’re getting from cannabis, we are obsessed in the market right now about looking over the next couple of quarters of either demand. And I mean outside of cannabis.
So, what’s going on with Apple’s (AAPL) demand? What’s going on with, you know, is the consumer really pulling back? There’s inflation pressures, but we are actually obsessed with the next quarter or two. And markets typically are, right? The guide out for 2023 or for the fourth quarter is what everybody’s waiting on, but if you’re investing in cannabis, you know, and truly if you’re thinking about this industry the way I believe you should and how I think about it in my ETF is, I’m investing for the next years.
Doesn’t mean you give people a pass on what’s going to happen in the next couple of quarters, but really, and I spoke to a bunch of the research analysts too. And they – and it’s kind of echoing Boris’ point that thinking about the next two to three years is not a comp out, it’s not to say that we don’t need to improve margins. And I talked to him about that his margin profile even in the next six months, which should be improving, but I guess most investors aren’t really, you know, a portfolio manager sits down with a CEO or an analyst, most of the time, being obsessed with the next couple quarters is not what it’s about.
So, I think playing the long game, whether it’s Curaleaf or Cresco or Trulieve (OTCQX:TCNNF) or GTI (OTCQX:GTBIF), I mean, we all know the names of these companies. I think they have been playing the long game, but we have these trends that are also part of an economic cycle outside of this industry. And then, obviously, the things that are pushing around this industry from inside the industry, and that includes, you know, a lot of supply coming online. It includes more states, you know, bringing more licensees into the fold. So, this is part of that complexity.
RS: So, to a follow-up question if a retail investor is like, okay, fine. So, it’s going to take a couple years. So, I’m going to start investing in a couple years, why should I be investing now? What would you say to them?
TS: I’d say that we’re – we’ve worked through some painful moments already. Patience is what I would urge. In fact, I tried to bring this on Fast Money last night, but when I think patience, I think guns and roses, and I think axle, and I think, you know, just a little patience. And I think patience from markets more broadly is really important because I don’t think markets are going to get away from you, whether it’s the NASDAQ or cannabis markets in the next three to six months, I don’t.
There’ll be some headlines and I said this yesterday on my investor panel and I say it all the time, but, you know, tell me the headline. I’m not even sure I can tell you what the market is going to do. Tell me the safe banking headline. I’m not even sure what the market’s going to do two weeks after it. I can, you know, I can – again pretty good idea and I’m not going to estimate what the market will do, how much percentage wise [that day] [ph]. But I think it’s fair to say that maybe you don’t need to rush in here.
And I would also say though that if you’re investing, you are investing, you’re trying to be early in in trend and you’re still very early. And, actually, if your new money, boy, you missed a lot of pain, and that’s great. And one of the things that I often bring up is that my first real foray into emerging markets is when I left a job at UBS Trading, global debt and a nice, like, beautiful trading floor in Park Avenue [indiscernible] not to move to Russia. And to move to Russia to be an emerging markets guy. And this was really right when Russia blew up in 1998.
So, I arrived in Moscow in, like, August 18, which is the day after the government sacked, you know, the government was sacked. They devalued the currency by a couple hundred percent. They defaulted on $40 billion a day. And it was the final nail on the coffin for long-term capital, which was when [genius] [ph] failed and all the smartest guys in the room and these Nobel laureates. So, I’m bringing that up because I wasn’t an EM guy, and I arrived in Moscow, while everyone was leaving. And to me, I remember raising my hand once compliance issues weren’t quite as intricate as they are today and going to the head trader and say, you know, buy me some Gazprom. And he’s like, kind of laughed. He’s like, the new guy wants to buy Gazprom. Everyone’s like, ha, ha, ha, and – but that was the best purchase in my life.
It was the best investment I ever made. And, you know, obviously, Gazprom is a Russian state-owned company that at times has been home run and at times has been madness. And I’m not even talking about the sadness in Russia today, but – and Ukraine. But cannabis, like, look, it’s a painful time, but I do think that if you’re finding the right companies today, these companies are certainly, there’s a lot of intrinsic value, there’s a lot of assets that are undervalued, there’s a lot of assets that maybe are overvalued.
Some of these licenses that people overpaid for, you know, with the Cresco Labs, Columbia Care deal is one where there’s still licenses that need to be sold that were, you know, that have to be divested and that some of the parts is very different than it was even six months ago. So, some assets are worth less. I feel comfortable saying, if you’re finding companies that are going to be in business for two years, you should be lagging into those positions today.
RS: Buy when there’s blood in the streets.
TS: Yeah. Right.
RS: Fair enough.
TS: Yeah. Yeah. That’s – I think that’s fair, and here’s the other great cliche that is overused by me. You make the most money when things go from terrible to just bad. And, I mean, whatever. Draftkings is up 80% off the lows on a couple. Things are actually legit, but just an example. And Draftkings might lose another 40%. And sometimes don’t be afraid to trade. And that, you know, as a guy that runs a Cannabis ETF that’s the other thing.
There has been a lot of opportunities to trade this market. And I know that’s easier said than done, but especially for a self-directed high net worth investor that uses Seeking Alpha to give a lot of insights, like, I think you can do that in cannabis.
RS: Yeah.
TS: I think, you know, if I’m a big hedge fund, I can’t do it as easily. And we – I’m somewhere in the middle in ETF land because also, I don’t want to over trade. I come from a background of long short EM equity, which I think by definition means you’d, kind of do over trade. One of the things I love about running a cannabis ETF that’s active is that I feel that I’m paid to actually do more than just, you know, rebalance. And again, we definitely we’re not about a passive rebalancing strategy.
I’m trading stocks, but there are periods where I’m not doing a whole lot and there are periods where I’m doing more, but I do think that there is an opportunity to outperform this market if you’re switched on. And I think there are companies also that are differentiating themselves right now. And I think in multi-state operator land, you know, and the MSOs, like, I think they are still the most interesting investments, but some are separating from others. And if we expect to be at the top, you know, the top weightings in our balance sheet to the U.S. operators, but not all of the big five or six are going to continue to, kind of be the five or – top big five or six.
RS: How do you see it playing out when you talk about active management? And sometimes you’re more active and less active, how do you – is that based on trends? Is that based on like the acquisitions coming down? How does that work?
TS: Some of it is a function of, frankly, just the constraints and the challenges of running an ETF. So, liquidity issues I have to face within a portfolio where a certain amount of portfolio has to be – have a liquidity profile. There’s, you know, owning U.S. multistate operators. We own them on swap, which means we can’t own them outright in a SEC Governed 40 Act product. So, we own them on swap, and I have some caps there. So, and at times and I’m – we’ve actually increased the cap of how much we can own. And I think we’re about to increase it again.
And again, it has to go through a compliance process, but so sometimes, it’s a function of those things. Sometimes it – look sometimes in a downdraft being in cash is really important. So, at times and I’ve been – I’ve had to do creative things to stick to a benchmark, which says I have to have more than 80% of my portfolio, 80% or more percent of the portfolio has to be in companies that have 50% or more percent of their revenues coming from cannabis.
So, at times, that’s meant in a downdraft, actually, I know it sounds crazy, but especially in the last nine months, owning a cannabis SPAC that hasn’t de-SPAC’d yet, but the structure is listed to $10 and it may trade down to 9, but for the most part that entity will be defensive. It will be a portfolio stabilizer. I have about 12% cash in the portfolio right now.
I’m not ready to put that cash to work. And even though I know I’m paid to have investors invested in cannabis, I think we’re in a difficult place and I don’t have a lot of room in there, but to get back to 2% cash or fully invested, I want to see a little bit of the dust clear on some of macro both inside the industry and outside of the industry.
RS: How does that look like being cleaned up on the macro side? Like, what does that look like to you?
TS: Yeah. So, leaving aside exogenous markets, I think cleaned up means we have a better sense of how bad it gets in the worst markets. So, markets in California is certainly one of them and where prices settling in, where is there really a cost of production that will weed out, pardon the pun here, a lot of extraneous supply, but where’s profitability? And so, I think we just, we want to understand, but a market like Michigan has been awful and Pennsylvania [indiscernible].
So, I mean, some of this is trying to see where wholesale and retail markets settle in. I think we’ll get a little more clarity on that. I think this is still an evolving dynamic for this industry. Also, those companies that have the ability to first of all generate free cash flow from operations, plus or minus their tax bill, but let’s see where some of these companies become a little bit more cash flow focused. And some of these companies can pull back on their spending. And I think some of that, you know, we like, I want to see better balance sheets, I want to see at least some of these trends, some of these companies claim they are going to see some increase in cash flow and margin. So…
RS: The other thing that I was struck by that you were talking about with Boris, that were said that he was most excited about beverages in terms of form factors that he thinks it’s going to be 50% of the market. I think he said in a couple years. Would you share that sentiment?
TS: I do, and I think that it’s part of a maturing industry also from the production and the infrastructure involved in building out bottling cans, etcetera. And what is entailed there. And that truly is where you get into the brands. And in fact, there’s a couple companies that I know pretty well that our craft brew companies that that I think are going to be well positioned for this.
And I, you know, I realize it’s a very different business, but that – it gets to all to the mass adoption dynamic that that we are seeing in heart seltzers and I probably joked like this, used this with you before, but I drink Coors Light, not because of those mountain barley hops and, you know, but because – because I can have six or seven Coors Lights and probably be as functional as I was before the first. And I mean, microdosing, especially as it goes into beverages, and people like to consume beverages, you know, people like to sit in the park and wherever it’s legal to do that, you know, So…
RS: But what about the [onset] [ph] time? Or do you think that’s going to be figured out?
TS: I think that’s part of what we need to figure out. And, you know, I know what the onset time is going to be for Coors Light or a shot of whiskey. You know, and I think that’s part of where the industry needs to go. I think the industry is very close on some of that, but I think that will be part of the adoption. And to be clear, I’ll take myself again. I feel a lot more comfortable taking a cannabis infused beverage and having a couple of sips of it. And maybe being a little unclear on where the onset and some of the metabolizing effects are, but that more than, you know, pulling on a pre-roll, you know, and take in a couple puffs.
And I just think that some of that is where the broader adoption for the industry is going to come. And people that are cautious and people that are not at all averse to the plant or not at all averse to the social issues, there’s no stigma, are truly either, kind of, you know, control freaks, they want to be in-charge. They don’t, you know, they know they’re not going to die and freak out, but they don’t want to get too high.
So, I think that’s really important. And I think beverages are going to play a role there. Obviously, some of the most successful, sophisticated CPG companies in the world are beverage companies. They should want to be a part of that. And where they come in or where they don’t is also very interesting. We know there’s a handful of them that have already made a first run.
RS: And do you see a more – I feel like that we’ve talked about this maybe, but do you see it more as, like, an alcohol cannabis bar scenario? Do you think it’s going to be totally separate? Do you think it’s going to be more take home experience socializing with friends? How do you see it?
TS: Yeah. I think it’s complicated because the take home experience is probably the first round of this. We haven’t really in different – it’s going to be different in different places, but obviously, there’s a challenge to smoking at home for a lot of people that live in an apartment building or a co-op or with kids, or even in a park, you know, a lot of places, this is illegal. So, beverages may be an alternative to that and actually may be easier to consume a beverage at home.
And so, I think that’s just something to watch, but I mean, these are part of where we are in the maturation of the industry that we started talking about. I mean, these are cool things to be talking about. It really wasn’t time to start talking about it two years ago, three years ago, five years ago. So…
RS: Right. Yeah. Considering that we’re still not there, and it’s just, kind of getting started, but you are – but we are seeing a lot more beverages in the marketplace, which I guess is the beginning of any, you know, cycle. What are you seeing as, kind of what are your and I don’t want to make this a prediction question, but maybe, like the trends that you’re thinking about and seeing, and, like, if somebody asks you what see coming up in the next couple of years?
TS: So, just I’m more interested by – on the legislative path, the research bill that went through the Senate unanimously, and what that means also in terms of getting people on board with legislation and getting people in off the ledge from extreme positions they took on the plan. And so, you know, that’s something that that I actually am excited to now see some of the follow on that, you know, look, research as it relates to the wonderful complexity unknowns of cannabinoid science, I think, are the things that are going to be most fascinating, and the things that are going to be able to allow people to really get behind some of the medical advances here.
I don’t know that we’re going to have – we’re not going to have the cure for cancer, but I think we’re going to have in terms of treatment, in terms of where you have different onset and different impact for different people. I think the legislative environment will be interesting, but more importantly, I just, you know, the steady [drumbeat] [ph] of more states coming online.
You know, that’s the most important thing we can do, and that’s certainly a case where we’re going to continue to see a positive dynamic for the market because at some point, it’s too big to ignore. And even, you know, some of the parts that are awkwardly you can’t, kind of put the genie back in the bottle are the things that we’re going to begin to.
And again, I think the next six to nine months, whether something happens between now and year-end on a lame duck session in Washington or not, real decision makers are having this conversation. And in the next Congress, this isn’t going to be a fresh conversation. And that’s – those are the things that are, I think, the trends and the themes that I think more about in terms of just – within the cannabis investment space, I think we’re going to continue to see separation between larger players and what they have in terms of flexibility to go out there in capital markets and do.
I think we’re going to continue to see more debt products get listed. And I think that’s actually pretty interesting because that will bring in a different group of investors. And yeah. I think, ultimately, cannabis is going through a really painful, kind of second or third bear market here, but that – it’s going to be rebuilt on a different foundation. So…
RS: Do you feel like you have a sense of a timeline on that?
TS: Which part of that?
RS: I guess the federal legalization and, kind of even if there’s like a small catalyst within, kind of even if it’s not federal legalization? Like, are you of the opinion that safe banking is going to come first? Do you feel like some type of up listing deal happenings?
TS: Right. Yeah. I mean, the attachment to some larger bill is what it’s going to be. Is it going to [happen] [ph]? I’d put a very low probability between now and year-end. And it’s strange to me, but shouldn’t be surprising that within the industry, especially even around here at this conference, I think people are expecting something.
They’re not expecting, this Panacea headline, but I believe there’s more likely going to be some progress as we get into the first half of 2023. I kind of feel that I realized, you know, a likely outcome is that the house flips and we have a split government where [Dems] [ph] hold, you know, senate or some control in the senate. I actually don’t think that’s as bad as it sounds. And I know the house has been this rallying point for cannabis, but again, I think we’ve already had the conversation. I think, you know, I think I think there’s three Republican Senators at this conference, you know, talking about cannabis. So, I think that’s, you know, that’s the good news.
RS: Yeah. I would say, like, the genie has been let out of the bottle. I would say the bipartisan genie has been let out of the bottle. I guess, no longer just a democratic issue.
TS: Yeah.
RS: Thank you, Tim. I appreciate as always. Thanks for making the time.
TS: It’s a pleasure to see you. Pleasure to be here. Pleasure to do an in-person and [indiscernible] to the next one.
RS: Likewise. Thanks so much for listening to the Cannabis Investing Podcast.
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