Editors’ Note: This is the transcript version of the podcast we posted on March 16. 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. Super excited to bring back Tim Seymour from CNBC today. Of course he’s on Fast Money on CNBC. He’s Portfolio Manager and Chief Investment Officer of his ETF NYSEARCA:CNBS, which we get into today.
And Tim, coming from CNBC from news, used to live in Russia, has worked in those areas, also get into what’s happening in the world geopolitically, how that relates to the cannabis industry, how that relates to cannabis investors and what we should be looking at and thinking about. Super timely episode. Always great talking to Tim, always enjoy when he comes on the show. Hope you all enjoy it as well.
All right, Tim, welcome back to the show. Welcome back to Seeking Alpha, The Cannabis Investing Podcast. It’s great to have you back on.
Tim Seymour: Great to be here, Rena.
RS: It’s great to have you Yeah, in these tough days where we’re trying to figure out meaning and the next step, as we were just kind of like talking to your newsman, how are — let’s start there. Like how are you doing these days? Where are you at?
TS: Yeah, there’s a lot to talk about in the world, and in the world of obviously, the geopolitics and Russia-Ukraine, and as a guy that lived in Russia and was an emerging markets guy for a major part of my career, these are obviously devastating, scary, and incredibly unfortunate times. And then the inter connectivity between different asset classes. So I’ll stay out of politics I guess, but I’ll just say that as a man that spent a lot of time in that part of the world, it’s very sad.
And the dynamics around the commodity cycles and — but the interconnectivity of really global macro for markets is wild. And think of the impact on the euro, think of the impact on European government bond yields and spreads and credit dynamics that we dealt about in Europe. A decade ago Europe was about to blow. And so there’s different things at work here. Obviously the commodity long tail cycle that’s happening and really hadn’t — there’s a whole generation of investors that probably appropriately hadn’t invested in commodities and don’t really understand.
This isn’t to sound also arrogant. It’s just saying like the dynamics here are a function of just cycles that are long. And when I was living in Russia but came back, the U.S. had opened up, the U.S. arm of a Russian investment bank. And we were very active in commodities 2001, 2002 is when people first started looking at some of these things. Obviously oil prices were I think at their lows in the crisis of after Russia blew up, dotcom, you name it, long term capital, oil got down to nine bucks a barrel.
Now some of this was technical and weird dynamics with contracts and whatnot on the exchanges but oil was 21 bucks in the lows of COVID. And here we are talking about anyone’s been out buying gas this weekend knows that most likely we’re going to be well north of five bucks a gallon in the U.S. soon. And this is — a lot of people think, oh, well, winter is ending. It’s a beautiful day here in New York City. But 25% of U.S. oil demand is the American driver.
And we’re just getting into driving season and my guess is based upon reopening trends that are more social dynamics, leaving aside the economic ones and hopefully that part of the spectrum that we’ve had to deal with for the last couple of years continues to be trending in the right direction. But oil demand’s I think going to go higher. So anyway, there’s a lot to think about with regards to currencies and interest rates. The Feds meeting this month and we’re all short of 25 bps.
The question is really what what’s going to be going on in successive rate hikes. Can they do what really, I think we all know they need to do? Because yeah, there’s runaway inflation. And so back to Eastern Europe. This is coming at a time when the Fed didn’t need these additional pressures. And you’ve got them. But it does feel a little bit like Groundhog Day with gold, with uranium, with some of these other, as I say real kind of macro trades, that I think still have some life.
RS: Yeah. So kind of like, this is a cannabis podcast. We are going to focus on cannabis. But we’re also an investing podcast along with cannabis. So I think it does behoove investors to kind of have a sense of like the broader market, especially when it the world is obviously, like, so interconnected and so much craziness. How are you — yeah, go ahead. Go ahead.
TS: You’re right. And when I talk about — so let’s dive into cannabis so in the context of all this, right. So I talk about investing in cannabis as an asset class, as a new asset class, as an emerging asset classes, as an emerging market. And I’ve mentioned this to you on other podcasts, and people probably are getting bored hearing about it. But this is exactly the time to be understanding that the cannabis — investing in cannabis to me is a lot like investing in emerging markets back in 2002. It’s an asset class that a lot of people didn’t have the ability to invest in, because they were legally restricted.
So if you think about investing in China, local markets; Russia, local markets; Brazil, local markets for — I mean, there’s all kinds of restrictions back then on investing in these places. So even if you wanted exposure to these exciting consumption trends and macro stories, and you couldn’t do it, so but what I also always remind people is that you are going to be held hostage to exogenous markets factors. So what’s probably particularly disappointing to cannabis investors is that cannabis wasn’t rallying in 2021 through the spring and summer.
And as markets peaked into the late fall, and even really into year end, cannabis was not. And so that was sending a bad sign. Because it’s impossible to rally, if you are in a higher risk asset class where there’s not a lot of liquidity. There is an enormous amount of volatility. There’s not a backstop institutional bid to these markets where things get so cheap that some analysts in a building in Boston for a big mutual fund says this is so cheap. I never thought I’d see it here. And they start buying because the fundamentals are just too compelling, or any other major city, I just referred to.
And again, if it was 2002, I’d be thinking about, oh, we were all waiting for when Putnam or Fidelity or Mass Mutual or all these State Street. And so there’s — cannabis has been defined by high net worth retail investing, not because the institutions don’t care about it, but because the institutions truly can’t access it.
Every time we’ve spoken Rena, in the last a couple of years, we’ve talked about the restrictions on capital. And at times, it’s been more restrictive than others, at least relative to the time before it — we’re still dealing with issues on custody. We’re still dealing with issues on access to markets. Obviously traditional exchange listings outside of Canada, of are all but non-existent except for non-plant touching.
So this is a really difficult time to invest in cannabis. And it’s a more difficult time to invest in cannabis. And obviously, look, I think we have to identify that this is a moment where cannabis consumption trends and pricing trends and federal trends are not at all dictated by the global economy. They just are not. And so that should give cannabis investors comfort. And while yes, there was maybe some COVID pull forward, and some pantry stocking in cannabis, yes, but cannabis, all it really did was accelerate some trends that were already going on within the industry, like it did in other industries.
So I’m going to say that caution and enormous volatility. And I think for markets, and I think that means caution flags continue for cannabis. It’s been a very painful 12 months for cannabis investors. On February 8 of 2022 we hit the one year anniversary of the blow off top for cannabis. And so — but let’s just get back to it. This is a really exciting time. It’s a growth industry. And also if we were talking about streaming companies, we’re talking about Netflix. I mean, do you think you think that Netflix had a difficult 4Q and that their subs — actually their guide for Q1 actually was really difficult and knocked the stock down, 25%.
I mean, the same kind of thing goes. Do you think streaming momentum and the secular trend towards streaming is going to change in this country and the world now, and no one ever said it was going to be linear and I think that’s what’s going on with cannabis? No one ever said this was going to be sequential growth quarter-to-quarter that continues to build upon it. What we know is that state by state, independent of what’s happening with the federal government is that states are coming online, that they’re ballot initiatives. And the ballot initiatives are a lot more exciting on the state level than they are on the federal, watching the machinations between the House and the Senate.
And then whether the Biden administration is going to do anything here. And yeah, I’ll just I’ll leave it at that. But a lot of frustration with a lot of things that were talking about. And a lot of — and I know, they’re distracted. But on the state by state level, last week Maryland’s now ready to kind of vote in their Senate. And they are ready to go. This is not a market to stop the presses for, but it’s another piece of the puzzle for the East Coast that that is going in, to me a fantastic direction if you’re a cannabis investor.
And New York, New Jersey, a lot of frustrations about the rollout of those programs, New Jersey ahead in New York. And obviously, more delays just at a time when we thought we were going to see the impact of adult sales. And what it meant means for TerrAscend (OTCQX:TRSSF), Curaleaf (OTCPK:CURLF), GTI (OTCQX:GTBIF), you name it, we know the folks that are exposed there. But it’s coming and in New York, where I sit and I actually am very focused on the local market here too.
In other words, what’s happening with social equity in retail dispensaries, and what’s happening with the upstream and policy? There’s been some big things in the last few weeks that are very constructive about the pace of New York. And that actually may not be as dysfunctional, as we think. And we have a Governor in Albany, who actually really cares about this industry. And I don’t think just, opportunistically, I think really cares about the social equity dynamics.
And New York two weeks ago passed a bill that’s going to give hemp cultivators the ability to begin to cultivate THC, and why that’s good. And I think, let’s understand why they pushed that through. It’s not necessarily because they feel so badly for the hemp cultivators, it’s because they recognize that there needs to be more cultivation. And there needs to be more cooperation, if you’re going to stand up social equity applicants on n New York City or New York State or anywhere on the dispensary side, they have to have product on the shelves.
And so New York is recognizing both the chain of where we go from upstream all the way through to downstream. But that’s actually good news. So I won’t get lost in New York other than say — I am actually relatively encouraged by what I see in New York. I’m relatively encouraged by what’s I think finally about to take place in New Jersey, a State like Maryland is going to have adult market soon. Connecticut is about — so the East Coast is going to go. And these are things that for cannabis investors, three years ago, you wouldn’t have thought was going to be the scenario — two years ago, you would not have thought that was the scenario here.
So while one year ago today, we were riding the crest of a change in Washington and a change in composition in the Senate, and actually announcements from New York, that were just kind of, more the announcement than then then the practical reality of how this was going to unfold. We’re here in March of 2022 with markets — and an addressable market and a geographic map of the United States that continues to get really more impressive.
And this is a global podcast. You’re sitting in another part of the world. And cannabis is a global industry. And the progress in Europe is, again, not maybe the runway expectation, and I think we were all a little bit miss — I think we were a little misled by some of the players that claimed to have some businesses in that part of the world, but that didn’t really have the business that they did. And maybe they didn’t understand the political dynamics, but I think Europe is a much more encouraging story with the right temperance to that story.
But obviously, in Israel, you have a reasonably mature cannabis market, at least as it relates to the science side of it, and an understanding of medical efficacy. And look, I actually feel somewhat in need of like, defend Canada more at this point. Because again, we talk about Canada’s role in in the cannabis industry in the last three to four years, and it’s been easy to vilify Canada, but it’s really — this is a function of a lot of what’s gone wrong with Canada, what’s wrong with capital markets and the capital impediments and the things that we talked about at the start of the show. And you can’t be critical of Canadian LPs for being able to access U.S. capital on the New York Stock Exchange or the NASDAQ.
And that actually Canada is a market that also had painful bureaucratic centralized decision making that was really difficult on over capacity, LPs. And so some of this stuff’s starting to turn. I’m not banging the table to say Canada — Canada is game on. I’m just telling you that the Canadian story is better than it was six months ago. And that the market is actually working through over capacity.
There is consolidation, Tilray (TLRY), HEXO not a reason to go crazy here. But I’m long Tilray. I became long Tilray when Tilray, Aphria came together, and I own Aphria because I thought they were the best operator up there. And the Tilray-Aphria combination afforded probably mostly synergies on costs and whatnot. But again, the HEXO deal with Tilray isn’t oh, wow, this is a global juggernaut now. It’s not expanding, really additional balance sheet. It’s taking on $205 million of debt. It’s a company that six months earlier had bought Redecan for a billion dollars. And I think there was intrinsic — I think there’s intrinsic value there.
I think being the biggest player in Canada is something right, in a market where, where cannabis investors have rewarded companies that are maybe narrow and deep in one state, right? So I mean, if Tilray — we don’t need to get lost on Tilray. I’m just saying there are reasons to think about Canada, through the context of the evolution of the industry as well. So I’ve been rambling sorry, but we know the negative stuff, the positive stuff is, and this is without getting, I think, overly euphoric and hyperbolic, and there’s a lot of that that’s gone on in Canada for years.
I think you can rationally say that the size of this marketplace continues to grow, that the operators continue to get better, that the C suite continues to evolve, that the legislation continues to evolve. There’s nothing here in this story that is disappointing other than the price action.
RS: Yeah, exactly other than the price action — and I think looking at cannabis, especially as we’re seeing the world kind of evolve and evolve, and how people are reacting to that, like just talking about cannabis itself, the plant, and how it medicates and treats and how people use it. That is a growth story. Cannabis itself, just looking at that as a growth story. And so like, how it works out, how you play it. But I think that is always going to be on an upward trajectory in terms of the growth picture of cannabis itself.
Kind of talking about, like, kind of you gave a whole high level view of the cannabis industry just now. Is there a change to your thesis? Or would you encourage investors to rethink some kind of thesis in the face of these geopolitical events globally?
TS: Well, I think it’s always critical to own a company that’s going to be able to survive, and if not thrive — execute on their footprint, and on their current asset base in an environment that may have really difficult times for capital markets. So that’s always been part of the thesis too, though.
So I think you’ve wanted to own operators that maybe without what’s going on in Eastern Europe and without the Fed — the Fed alone might be a reason to be concerned about access to capital. But I think we’ve always been cannabis — had to be focused on entities that that really are able to live within their income statement. So that actually the free cash flow generation. There’s the adjusted EBITDA dynamic of these companies is still kind of a heavy asterisk but that at least free cash flow generation companies that are actually able to build some dry powder, just on their core business. And we’re seeing that. You saw that from GTI last week, in their Q4 numbers.
They continue to — they’ve done some really interesting things in terms of how they’ve been able to also go to capital markets, find a handful of institutional investors do some private placement type deals, borrow at rates that are pretty attractive, maybe at the lows of at least the rate cycle for some time, and yet show significant free cash flow generation from their core business, to be in a position to actually look, the longer federal goes, I think some of the larger MSOs are going to be better off not worse off on some level, because I don’t think they have to go hand in hand to markets.
So yeah, I think the thesis is the same. I do think we’ve all become better investors through some of this, and that I think we are even someone that’s spent a lot of time in emerging markets and feels that I’ve seen some of these cycles before it as it relates to pricing. So pricing — and this is of a macro, but it’s kind of a bottom up macro dynamic around what’s going on with wholesale prices. And state by state, limited license states, California, hitting really depths, kind of in the last part of the year. I think there’s been a bit of a bounce. All my conversations with kind of premium flower folks in California is that at least the markets ticked up a little.
So that’s good. But that — I think we’re a little surprised, and probably shouldn’t be that states that are more limited license states are running into price compression, and that there’s promotional activity that is also weighing on prices. And that there’s an illicit market that’s never been more emboldened and bigger. And right now, I mean, the illicit markets as big of an issue as any issue that cannabis is facing. And on some level, this is the thing that I think we all maybe underestimated.
I know I did, because the sense was that there was going to be a consumer response to an illicit market that ultimately said, I’m very comfortable walking into a dispensary and that da, da, da and that competitive practices are going to have that. I don’t think that the illicit market, at some point will be that much more of a cost competitive advantage etc., etc.
But I mean, these are the things that think in the thesis we’ve had to mark down a lot of our targets. And I think I’m a little surprised that the analyst community, easy to pick on the sell side analysts. I won’t, single them out solely. I think, buy side and sell side analysts in cannabis, kind of shocking to me that it’s taken people so long to downgrade some of the growth projections, and I kind of want us to get to a bottom assuming that the industry gets to a bottom. I hope that that’s where we are soon.
RS: So kind of staying for a second on the recent earnings that we’ve seen from some of the operators. A couple of things that I’ve been wondering about, and I’m curious what your thoughts are, what your takeaways are from earnings. But a couple of things is the pricing compression that you talked about that’s obviously discussed a lot. How you’re thinking about that, and also how you’re thinking about guidance, or I guess, lack of guidance coming up? And it’s understandable, I think for investors to see why people are scared to give guidance.
At the same time, I know, it would give a lot of investors a lot of encouragement if they saw more concrete guidance come out from companies. How are you thinking about that, as kind of your takeaways from these earnings?
TS: I’m thinking about guidance in the context of ’22, just first half, second half. And I think the companies are also focusing more on that. And I think they’ve guided that the first half is going to be tough. And I think that they’ve guided that the second half is where there’s more cultivation coming online. New Jersey should be open and running. So I think that out of this earnings season, we’ve gotten some sense in where the data is coming out on pricing, and just where some of the companies were.
Look, I think GTI, back to them, they have given, I think there was some sense and some restated estimates that kind of were in place going into these earnings. So I think a handful of companies have managed through sit downs and breakfasts and analysts meets to get the word out there. In fact, if anything, I think they were all trying in the fourth quarter, and even in the third quarter. And this is where the expectations of the Street, I think were late, and they came in. The early part of the year we had folks downgrading 4Q, kind of in the aftermath, which was a little surprising.
But so I think the lack of guidance is a concern. I think it’s probably more the recalibration of growth estimates. Where do you think the industry is on a three to five year CAGR, versus where’s it going to be in ’22 versus ’21? And really, obviously, sequentially where the last couple quarters of ’21 were, vis-à-vis ’20. ’20 was just an unbelievable year in terms of inflection points and I think you’re going to see growth come back into the market in the second half of the year.
I think I think investors may be surprised by some of that. But I think there’s been an appropriate amount of caution put towards that. And look, the industry has always had trouble with guidance and pro formas have been really absurd from day one. And a lot of it was — and if you think about the investment metrics we look at with the industry too, this is something else that I think investors need to need to think about and constantly reassess, what’s the greatest — what’s the most appropriate metric to assess an earnings profile of a company or just a valuation profile.
And remember, when we were talking about funded capacity, whatever that was, it was more of an asset base multiple and reminds me a lot of commodity-based multiples, where yeah, production multiples for oil companies and reserves and things like that really makes no sense. And on some level, I think the — I actually don’t mind a price to sales multiple for companies and think it’s pretty relevant, especially when EBITDA from a taxation perspective is still not clear.
And so I think as we’re looking at — I mean, clearly again, they’ve reestablished and set their guide for ’22. And between $1.5 billion, $1.4 billion and $1.5 billion, so let’s take that middle part. And now you’re trading inside of three times sales for Curaleaf. And I think that’s worth noting, I think that’s pretty attractive. And I think they’re not the only metric to be looking at and the industry is focused on margins. But margins are coming down. They’re going to continue to come down. And I think cannabis is going to end up with a premium margin profile of other CPG. But it’s got to come in.
And I — this is actually a really good process that the industry is going through, because I think a lot of folks just didn’t expect it was going to happen this fast, didn’t know was going to happen, though cannabis could always be different. And in limited license states when you get out of the gates, and there’s still barriers to additional cultivation and illicit markets still not serving the needs of the local population, you’re getting premium flower price, 4,000 to 5,000 bucks a pound, but not forever. And it won’t forever.
And ultimately, we all have said from the beginning that this is about brands, and these are companies that are building brands, and again that’s going to be what insulates the better operators, but the better brands. The better companies are the ones that are building brands, and they’re the ones that are better understanding their consumer and better targeting different demographics. And so that’s the part of this, that coming out of earnings season, it would be interesting to see how the market would be reacting to these numbers in the absence of the exogenous market factors
RS: Speaking about metrics and specifically Curaleaf, we’ve been talking a little bit about focusing on companies that are already reporting in GAAP. Do you have an opinion on that? Do you feel like investors should be focused on that or staying away from companies that aren’t yet reporting in GAAP?
TS: I think I think U.S. GAAP is a standard, and companies should be held to it, and they should be getting there. And how heavily penalized for not being there yet. I think, look at the run — call it the running history of a company. Like if they’ve been a listed company for five years, they should have U.S. GAAP. And I think companies that have consolidated in maybe really in the first couple years of their business, first of all, if they’re plant touching entity that’s listed in another place, they may not have this obligation. And I think the market is holding these issuers to that standard.
I think corporate governance metrics are of course critical on some level. They’re more important now. They’re just less understood and it’s more of a blunt instrument to assess companies with now whereas corporate governance subtleties and transparency and accounting practices and standards in traditional developed markets are the things that really define the difference between multiples of how companies trade. So investors should be thinking about those companies that are going out of their way to do this. And I do think they should be paying a higher multiple to companies that have U.S. GAAP.
RS: So looking at this legislation and looking at how the states are growing, we talked about all these states coming online, even in the face of federal inertia, are you feeling and you also talked about, like how Canada is starting to learn its lessons and figure out how to kind of keep growing that market and keep progressing?
Do you feel like there is something really positive about it being a state by state approach and coming online like that, and companies having to figure out kind of like maneuver the different states and the different cultures and the different laws and the different licenses and all of those things as a way to kind of get to the top?
And then when, — well, let me leave it there for a second. Let me ask you that question first.
TS: Yeah, think about the booze industry, think about highly regulated industries, where you really had interstate issues. And yet you could establish national brands. Like the state by state evolution is what we have, and what we’re going to continue to have, I think, for the foreseeable. And I certainly think interstate’s not happening anytime soon. And therefore, I kind of like that they’re going to be regional powers. And they’re going to be companies that have really built great businesses, in one or two states. And I think it’s going to make it fascinating for consolidation at some point down the road.
And I think there will continue to be markets that are a lot more important than others. And I think we’re not going to be terribly surprised by those. I mean, they just aren’t going to be the obvious ones. And so I think the way the industry continues to unfold, and the fact that each state has to build out state by state has made them all better. And I think has made them be more efficient in how they allocate resources. And I think the 1.0, or maybe the 2.0 version of really just trying to claim your nine states, when you threw assets — and we don’t need to pick on those folks, but some of them have already gone through bankruptcy. Some of them have already been taken out for pennies. And that model didn’t work.
So I mean, I think where it’s evolving right now is probably very good for the long term.
RS: And do you have any thoughts on, talking about how the illicit market has been so much more successful than probably anyone was predicting? Do you feel at all like you talked about interstate commerce being far away? Do you feel like as the states come online, there’s going to be like a de facto interstate commerce that lends itself to kind of understanding that it may be further along than we — then the federal picture would have us believe? Do you find like anything like leading to that from just the fact that the facts on the ground are showing something different than maybe the federal laws are
TS: The facts on the ground or what we’ve known to be how the illicit market is operated. And it’s just been more emboldened by social tastes. And the focus that cannabis is not a bipartisan issue and all these things that we know about, and it’s largely being voted through state by state, Oklahoma — Oklahoma and California, weed is everywhere. I mean, Oklahoma is one of these, like, things that’s not kind of weird for people who don’t know a lot about the industry like Oklahoma. But Oklahoma, illicit is all over New York City.
And it’s right — it serves a product class. And ultimately, this is where some of this stuff will go. But I think it just reinforces that at some point, this is a national industry. Brands will be built. I do think that the trends around the illicit market are ones that I mean, put it this way, are people really buying bathtub gin? Are they really — are they going in and — no. And I think it’s not telling us if — we know where it’s going to go.
We know that there’s going to be pretty strict regulations state by state. We know that they’re states that are going to stand up for their borders, and the industries that they built, the people that work there. I just don’t see that changing. I do think that there’s going to always be an illicit market, as long as there are — as long as there are these kinds of barriers. But I’m not — I don’t think it suggests that we’re going to move faster to an interstate commerce model.
I just think it suggests that societal indifference that illicit markets exist, like, legacy is a term, that’s actually — being a legacy operator is like, applauded in some places. And I’ve mixed feelings about that. I get it. And I get that, especially when you think about social equity, there are a lot of people that have been in business for a long time, and they deserve — that business deserves a shot in the new world order. And I also believe that people are operating outside of the laws shouldn’t be rewarded.
So there’s — it’s a complicated issue. And I’m just taking — having fun with legacy, because now legacy is your kind of, you’re seen as good if you’re a legacy player.
RS: Yeah, it’s definitely complicated to be sure. There’s a lot of moving parts here that are hard to suss out. So looking at the landscape and kind of in thinking about it in terms of like CNBS, and your ETF and how you’re thinking about allocating things, and also how investors should be thinking about it. Are you still focused? Like is your sweet spot still the MSOs, the U.S. MSOs? Or is there — do you have a particular liking to some of the more mid-tiers or maybe some of the consolidatees, the people that are going to be acquired as opposed to the acquirers?
TS: No, great. It’s great to kind of get to this part of the podcast, because I think we’ve talked about a lot of the issues setting up. I run an ETF and we’re an active ETF. And I’m a portfolio manager by background in emerging markets and all the things that we talked about. So just to give you some sense of how I view both, what seems and is supposed to be and how we’re going to continue to invest. We’re supposed to be by having cannabis in the name, we’re supposed to have, more than 80% of our companies in the portfolio have more than 50% of their revenues.
We have to legitimately be representing what you can invest in the industry. Which doesn’t mean though, that even if I had no restriction, and to be clear, we still — we own U.S. MSOs via swap. So we can’t hold plant touching businesses in the U.S. in a US 40-F listed product, but we have a legal opinion, and we have the ability to do it. And this is now tried and true. And give some credit to the guys that were out there that did this first.
I mean, I think it’s nice to have the exposure. The top five positions in our portfolio are U.S. MSOs. So we clearly want to be there. It’s the biggest market. And but I also think my job as a manager is to give the proper thematic exposure to an industry that’s going to continue to evolve. And I also believe that I’m supposed to maybe have some shock absorbers in the portfolio during periods of volatility. And so I own a handful of the kind of the debt plays that are in the market that have listed.
Most recently we participated in the Silver Spike BDC IPO. We have been involved in a handful. And we bought AFC Gamma (AFCG) IPO. And again, we participate in IPO markets, which is what I don’t think other cannabis ETFs are doing. We are — can I trade and fade moves in the market that are extreme? Yes. Do I feel it’s my job to do it? Not necessarily. I think being active means we can take advantage of overshoots and I certainly have a background running the long-short EM strategy. So it’s in my DNA, but I want to have the portfolio that people go to bed at night and say, I’m going to be where the industry is today. And I’m going to be where it is tomorrow. And that people are meeting with company management every day and, and checking in with them.
I own Weedmaps (MAPS) which is near the near the top of the portfolio, was a bigger position before it got knocked down, you know, by 60 to 70% really since the third quarter. I like what they’re doing. It is an E-commerce market. They are the largest. I mean it trades it trades inside four time sales. I mean they have a real scale to their business. They have a very high margin business. They are going to continue to evolve.
Also as the consumer continues to evolve, leaving aside they’ve got a whole software part of their business, their higher margin stuff and but I just think that they’re their core business and you know the evolution of personalization in advertising and focus on that and people that really, you know, are going to attack this the same way and are attacking it the same way that other ecommerce marketplaces are doing it outside of cannabis.
I mean, this should be in a portfolio. This should be a company you want to have capacity in and I do. And so part of what I do is, is I own what I think fundamentally has the most merit and I weigh things appropriately. But I want to own the companies that should be in this portfolio. And — I get a little frustrated. They’re there, by the way talented fund managers across the cannabis space. I got nothing bad to say about anybody.
I’ll just say that there are cannabis funds out there that aren’t cannabis stocks. They’re tobacco companies. They’re pharma companies, they’re any some cannabis companies. And that’s a great portfolio during a difficult time like this. But we were the best performing cannabis ETF in 2021. That was fully cannabis. And that’s important to me. So I think investors continue to want exposure thematically RIAs. People that are investing for their investors want to own this sector. I think it’s a great time, but I probably would have told you six months ago, it’s a great time. So there you go.
RS: It doesn’t mean that it’s not a bad time, though. I’m curious what your thoughts are on AFC Gamma, if you would share kind of your takeaways on that IPO.
TS: I think traditional secured lenders from another life outside of the sector, that are picking places where they want to be, I think more fundamental to the balance sheet of the companies that that they lend to. And in some cases, maybe seek to have, you know, the ability to grow with them. And I think they’ve done that with nature’s holdings, guys, they’ve done that with a couple other names, I see them also lending to a couple newer entities that are coming together.
So I think it’s a very interesting business model. I think it’s, there’s a lot of room to deliver, you know, very attractive yields to investors, who, again, are non-traditional cannabis investors, but investors from outside the sector. So I mean, I think that’s something that is what makes it very attractive as a holding. I think — again the team there are focused on finding new portfolio. I think there’s a very large pipeline that they could put money into those operations for the right terms that I think again, they kind of understand.
Also my sense is that they are seen as partners, not loan owned. So I think in the industry, that’s important right now.
RS: The other thing I wanted — and I think we can kind of close on this, unless there’s anything else you want to hit. But something that I wanted to get your thoughts on as New Jersey and New York and kind of the Northeast opens up, or is set to open up how you’re thinking about retail, like we’re looking at Planet 13 (OTCQX:PLNHF) in California with these super stores. What are your thoughts on the retail picture and how people are consuming cannabis when the state is legal? What’s your kind of vision or thoughts about that?
TS: I think retail is so under emphasized. And it doesn’t mean that the existing MSOs have under emphasized because they don’t understand that. I think they’re building vertically integrated businesses in most places. And just but that retail’s where brands are built and the getting back to New York City, the density and the wallet and the taste making that goes on here, as it does in California. California’s a little different.
California has been defined cannabis culture from the early days and I think will always, but as I like to say, brands are built in California, but they’re probably made in New York and some of the same ones, right? I mean, you’re not really a brand till you’ve made it made it here and I think at some point, Madison Avenue, which is the advertising world, but the marketing and the presence of brand building is what all these companies seek.
Planet 13 is a huge business. And that experience of walking into a Planet 13 for people that have never been into a dispensary is mind blowing. And it’s overload for some people. And again, that’s why that could be the Starbucks, whatever they are calling their roastery stores that are like these over — these massive places that are like gourmet this and that.
Whereas the little coffee shop in the West Village is the one that a lot of people prefer. I mean, dispensaries are going to be like that. There’s going to be the full spectrum. And I’m so excited about retail, and I think retail is going to be critical for the MSOs. And they know that and they just have different parts of their business to focus on. But companies like Planet 13, who have gotten involved, you know, not just with a retail footprint and have a broader integrated business model on some level, but recognize this is really where they’ve been built, I think are — I think that’s critical. And ultimately, they’re going to be in a position to make brands themselves.
RS: And do you feel like superstore model is coming to the East Coast at some point?
TS: I do. I mean, we — look, I go to Walmart, go to Target. I mean, I like that mind blowing experience as well. So no, I think it’s happening. And I just think that the nice thing about the way local markets operate is that I think they will operate very much in this. I mean, think about like the club and bar and lounge scene, say in New York and LA. I mean, they are determining what spirits are then take out place for Constellation (STZ) or Seagrams or whoever. I mean, I cannabis culture and the evolution here we’ve just begun, and it’s really exciting time.
RS: Absolutely. I think that’s a good place to end. Even though I could talk to you for like another hour and pick your brain.
TS: No, I wish I did. Let’s pick out a day when it’s not so crazy out there. I’d love to talk for hours. This is always such a great exchange. We’re having a conversation that I hope other people are just like dropping in on.
RS: Awesome. I feel the same way Tim. We’re going to have you back, maybe not when the world gets less crazy, but when the day looks a little less crazy because I don’t know when we’re going to get the former. Always a pleasure. Thanks for making the time and taking the time and sharing such great insights even when you’re super busy.
TS: No, never too busy for you. Thanks so much, Rena.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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