Editors' Note: This is the transcript version of the podcast we published last week. We hope you find it useful.
Jonathan Liss [JL]: We’ve got a great show in store for you today. I am super excited to bring you a legend in the cannabis investing space and really just a brilliant investing mind, none other than CNBC Fast Money Host, Tim Seymour. Many of you will be familiar with Tim’s work, but for those that are less so, he recently launched the Amplify Seymour Alternative Plant Economy ETF (NYSEARCA:CNBS).
There's a brief backstory as to how this podcast came about. I interviewed Amplify Founder, Christian Magoon for Let’s Talk ETFs, which by the way, you should all check out. So, I spoke with Christian the week that CNBS Tim’s new ETF launched, and he said you have to have Tim Seymour on the podcast, his analysis of the cannabis space is really just unparalleled, and he is an all-round great personality. After speaking with Tim for more than 90 minutes, I cannot agree more. Conversation just flowed. We cover really the entire space from top to bottom, broad trends, individual tickers, everything from Canopy and Aurora down to a bunch of kind of lesser known names that Tim recommends.
For reference purposes, this podcast took place on Wednesday, September 18. And now, without further delay, I bring you Tim Seymour. Welcome to podcast Tim.
Tim Seymour [TS]: Jonathan, great to be here.
JL: Yes, great to have you and congrats on the launch of CNBS, really hasn’t been that long honestly.
TS: No, it’s exciting. It’s obviously a very exciting time in terms of there is a lot of headlines in the sector, the capital markets are active, the markets are moving, it’s been volatile. So, it is the time that bring active management into the sector.
JL: Yes, absolutely, and I’m excited to get into the weeds here, no pun intended.
TS: Wow, you can intend those puns Jonathan.
JL: Pun intended. Nice.
TS: Yes. Anyways, so it’s great to be here to have this kind of a conversation on a sector that I think people understand the top down, and there’s certainly a rationale for making investments in the sector, but it’s complicated, and in all my time talking to investors in a lot of different asset classes over the years, this is the one that seems to bring the most anxiety to investors who recognize the investment thesis, but also recognize that both between the capital markets restrictions between the ever evolving, just kind of landscape within the industry, a very fluid regulatory environment and frankly valuations that are out of the gates, haven’t made a lot of sense, people are kind of caught somewhere in the middle.
JL: Yes, sure. That makes total sense in terms of all the anxiety that the sector has been inducing, particularly if you’ve been following movements on a day-to-day and week-to-week basis, but before we dive in here, I’d love for you to share your back story with our listeners and particularly what drew you to become an early stage investor in the burgeoning cannabis space, really before it was on most investors radars.
TS: Sure. Yes, it’s a pleasure to talk about that, because for me, I’m an emerging market investor by background, I ran two different long-short EM Hedge Funds over, about a 13-year period, and so from an emerging new asset class perspective, there is a lot of the elements of cannabis that line up. They include, early stage emerging markets were in many cases a top down trade, it was – in the mid-90s, it was about understanding who was going to get the next IMF tranche of lending. It was about where there was going to be a market friendly leader put in place, and these were things that had markets rally enormous amounts on very little in terms of bottom-up. I think the cannabis industry has proven that the regulatory environment has been alone enough to see a major influx of capital, even if it hasn’t been pure institutional capital at this point.
I think the dynamics around the corporate governance risks and opportunities for investors in accessing a new asset class are very similar as well. You have a case where in many cases you’ve got companies with very little operating history, companies with maybe less than three years of U.S. GAAP or IAS accounting standards, you have to make assessments based upon management teams or giving you proforma projections and in many cases pie in the sky projections. So, I think you also had a case where you’ve got some very talented management teams that were very successful in other industries that came over because they saw an opportunity and are very talented, but don’t necessarily have the ability to translate that into this sector.
I think the other big dynamic of cannabis is that it’s really a consumption story. It’s really a consumer product, and if I think about why people are really excited about investing in China and Brazil and in certain parts of the [indiscernible] world and – it was about a demographic story, it was about an emerging middle class, it was about a consumption story. So, you have all of those things here. That to me made a lot of sense. That to me made me feel as if not only I was instinctively drawn towards these types of opportunities, but also the skillsets that hopefully are similar tool box.
The capital markets dynamic are clearly similar in that when you think about the liquidity constraints in the market, you have – not only do you have this restriction on the U.S. Federal Environment, which has restricted U.S. companies from listing here, which has had Canadian Companies list here and I said, U.S. companies listed in strange place or [ITC], this has kept institutional capital out. This is exactly what we saw in early stages of emerging markets and so you get these pockets of liquidity.
You then also have these moments, and I remember when I was sitting in Moscow and Telenor, Norway’s States own company, but also one of the biggest global phone companies in the world started buying up GSM licenses in Russia, and that drove up the value of all of the assets both in the Telco space, but even it started to push evaluations in the country. We saw this in Brazil, we saw whether it was again Vodafone or some of the companies or whether it was homebuilders, so, you know we saw that with constellation brands, and I could probably go on longer than you want me to on this, but that for me is the background that made a lot of sense. I started investing in 2015 and one of my old partners from Russia was actually was being cast to head up the U.S. [arm] of Israel’s largest and first Cannabis player, a company called Tikun Olam, and we had partnered together and…
JL: Yes, sure, I am familiar with their work, I’m based in Israel. So, they're definitely the leader in the medical cannabis space here.
TS: Yes, it’s nice to have that context, and for the viewers and listeners, I should say to have that context because what made this so interesting to me is, here was a company – so my friend [Bernie] went out Israel and they asked him to head up the U.S. effort as they were building up the platform here and Tikun Olam’s heritage is in, really as much in science and research as it is in cultivation, and so the story for me around what was still so untapped in the U.S. and globally in terms of really the science behind what it already had been at least in the tranche has proven efficacy on a number of the based used cases for cannabinoid in a breakdown derivatives and even just as we have gotten into CBD and so, anyway, I was fascinated by this, I frankly wasn’t ready to [jump] [indiscernible] and so they put me on the advisory board, I made an investment, and that started my deep dive and I started investing in the private worlds.
I was dabbling in the public ones as again as an emerging markets investor, and then I started making a few more allocations, but I also started talking about the sector, and I started talking about the sector. I began to approach CNBC with the topic, and I was cautious about that because I really didn’t want this to be a situation where the perception of the sector was going to cloud really the investment case, and I wanted to have a – both a top down and a bottom up discussion on the sector as a consumer product, as social awareness and some of the other dynamics that maybe don't fit into business TV, and you know, the network not surprisingly was actually receptive and said, this is probably an area we should have some exposure. So, we started doing some segments.
The big joke is that the first couple of times I started talking about, you know, maybe the news, of course, was Canada going full legal, and we started having this conversation in maybe mid-2017 or California going for recreational. And so, these were obviously big events that was easy – that were easy for the viewer to understand. As I started out this conversation and my producer who’s a very smart markets guy, but also a guy that’s a great TV producer, as I started talking about Cannabis and the top down and the efficacy and for my industrial [indiscernible] I was interested, he started rolling, you know, B-Roll of [indiscernible] rolling out of a van, you know, with a cloud of smoke and bong water sound effects and so [multiple speakers].
JL: Maybe some [indiscernible] clips or something.
TS: [Indiscernible] clips and, you know, so it was kind of – it was a little challenging, but as I thanked him later and I said, you know, that was the best thing you could have done for me because – and for the sector because I was able to say, none of this is not the story. This is not about the stoners. This is not about a – even just a substitution effect for alcohol, but that maybe part of it, but it allowed me to kind of stand in the pocket, as we say is in the football metaphor while the pass rush was closing around me and actually say, you know, this is what you need to think about. This is what you need to listen to and, you know, thought leadership in the sector has comes from a lot of different places and I – you know I tried to just stand there from my investors lane.
Obviously, there’s plenty of people talking about the sector from social justice, criminal justice, from medical research, from – you know from, you know, lifestyle wellness, and there are all these sub-verticals, but, you know, that for me was, you know, a moment and became important because we started picking up coverage on it and a lot of the companies and people in the sector took notice as well, and that was great for me because it gave me access to some of the biggest companies and thought leaders and then conversations with folks that were doing a lot of work on the regulatory stuff in Washington and that's my network, and it's been very important to me as an investor to have that network.
And so, you know, Cannabis went from being a – an interesting investment topic and, you know, social experiment that I was watching like the rest of us in the United States and around the world to becoming a very major part of my day, and at this point, yes, I advise a bunch of companies in the private world and a handful that are public. I have a number of, you know, investments of mine and some of my investors in the sector. I’m also a strategic advisor and sit on the investment committee of JW Asset Management’s dedicated Cannabis fund, which is, you know, we think one of the more interesting ways to get exposure to the private equity and kind of hedge fund world, and then, there’s the ETF. So, it's many different touch points for me, and I think that's critical to staying on top of a sector that continues to evolve.
JL: Yes, sure. And I'm sure launching the ETF after all of that just kind of feels like it was a natural and organic process because you’re already there doing all the research following the sector on a day-by-day basis.
TS: Yes. It's very complementary. It's very complementary to my CNBC platform. You know it's funny because as a hedge fund manager, people – a lot of my investors were big institutions and they ask me all the time why are you on TV, like why are you doing this? And I – you know I…
JL: Its fine I’m sure, so…
TS: Yes, I was going to say, I didn’t really have a great answer other than I thought our show was a really smart show. It actually gave me also tremendous market contacts and insights. I also, in my early days, really I found TV because I wanted to have – get, you know, some more mainstream exposure for emerging markets business, so I thought a lot of people still were scared about the perceptions and some of the realities of investing there, by the way, very similar to the Cannabis.
So – and so, my goal ultimately was to have a retail product in the emerging markets to be the safe pair of hands to be kind of the everyday investors specialist and someone that was approachable and someone, you know, had a product that was understandable. And so, this is the first time that really, you know, I feel like I’ve had a product. It’s my first ETF. I recognize as actually a lot of risk attached to me doing this just because I think, you know, one, the EFT space is more competitive than the hedge fund space. It's ridiculously crowded. Putting my name on something is, you know, a risk and it's a sector where there really has been a lot promised and for many investors it's been a challenging time.
So, I think, you know, the great thing about the CNBC platform is that it really is a very broad and far-reaching audience who seek out hopefully, you know, objective and deep-rooted investment knowledge on a daily basis. And so, you know, if getting a Cannabis product out there is complementary or because people see me talking about it on TV, if – you know, if that's a natural, you know, next step in terms of offering a product that might meet some of that audience, I think it is a good idea. It should be noted. It took us, you know, more than a year to – it took us probably a year and a half to get the product open and that's something that shouldn't be a big surprise to anybody who’s been following the sector either because of the regulatory dynamics, and you know, running and SEC 40 Act regulated fund not only has a whole series of restrictions, requirements, necessary components of service providers etc., but then you – you know when you layer in Cannabis, you have some of the same things that are restricting the companies from banking and what not.
Getting a custody bank for a Cannabis dedicated ETF, not an easy thing to do, in fact, not something you can do in a traditional way. So, we had to spent a lot of time going through a – you know, a very strong group of service providers who were able to meet the roles necessary and, you know, we then went ahead and got a legal opinion that also was required by the SEC and something that we feel is important to have around the fund to make sure that we’re not investing with companies that are going to be putting investors’ capital at risk if they are violating Federal statutes or if they are being – rights are being overly aggressive in the United States, even though we haven't really seen any high-profile examples of companies that have come under, you know, a Federal.
You know the FDA has made some comments on a few companies, but in terms of just, you know, a legal process, confiscation of assets that hasn’t happened, but we needed to make sure that we were going to not put investors at risk in any way and we wanted to make sure that we had a product that had all the right service providers. And so, you know, frustrating because, you know, may be one of the early cycles – certainly no question, one of the – you know the first cycle of the gold rush into the sector has come and gone, and you know, we weren’t able to get this product out there.
The good news is that I think most investors are investing for the long term, and this is a sector that I believe investors are going to be making allocations to for decades, and it’s going to stand alone. It's going to be a sector that has all of these different sub-verticals to it, and is going to become increasingly more sophisticated and treated not only in top-down and bottom-up terms like investors who are following sectors, but I think you’re seeing the specialization around the consumer kind of products elements of it.
We’re going to make this look, you know, very similar to other very sophisticated sectors. So, ETF is launched. It's exciting; it's a great time to be investing in the sector, you know, is – I know we’re going to get into valuations and what's – you know, what's my sense of things, but regardless, we should be investing in the sector for the sector as a sector exist today, and our best view of where the sector is going to be on the edge of tomorrow. That's the goal for me as a portfolio manager.
JL: Yes. no, sure. That makes a lot of sense, and to some extent, I think, you were probably somewhat fortunate that you were delayed for the full 18 months and not for like 12 months because if you would have launched, you know, six months ago, things would look a lot worse…
TS: Yes.
JL: In terms of the longer-term returns.
TS: This is true. I mean, yes, I – in my days in Moscow, I got out there just as the place blew up, and I started working with handful of managers who were really smart guys that were distressed asset allocators and they started kicking the tires in 1999, and the track record of those guys because of where they launched was so extraordinary because they had a couple of years of phenomenal returns. Now, the flipside of that is that the guys that raised the fund at the top of the market in 2007 are actually in emerging markets they’re actually still underwater. So, you’re right.
JL: Yes.
TS: I mean the timing of this is something you can’t call, and we were in the sort of long haul.
JL: Certainly, yes. You like launching a Japan funds in, you know, 1988 or something you’d still be totally underwater. So, yes, no that makes a lot of sense. So, yes, love to get into valuations here a bit. We’ve seen a bit of a bounce off of the lows over the last month or so, but overall with the carnage that we’ve seen in the space, I’d have to think that valuations are a lot more reasonable than they were say 12 or 24 months ago. Well, what's your sense on valuations in the space at this point? And when you think we’ll start to see a genuine turnaround?
TS: So, valuations are a function of not only where the market is going, but where it’s come from. And so, valuations are definitely, you know, a function of, I think, these unrealistic expectations in terms of market cap. I think the – you know the good news for valuations is that you also are starting to see relief in valuations coming from operational success or some measure of it or a relative basis. And so, when evaluating growth companies, investors need to assess really what is the most important valuation metric. Right now, the Cannabis sector is being held to an appropriately kind of rigid and bright light on profitability. But, you know, even before you necessarily get there, I think it's critical that the companies are proving that they’re growing their toplines. So, I think if you look at where valuations are and where they’ve come from and where I think they're going, if you – if you're looking at – and I guess we should probably talk about Canada versus U.S. too.
JL: Yes, definitely.
TS: So, you know, because I think there's well-known difference of where they stand in terms of, you know, Canadian versus U.S. valuations, but basically, if you're looking at kind of EV/EBITDA and EV to revenue multiples, which I think are the most sensible and I think, you know, clearly the EV to revenue or even a price to sales, they are very similar in the Cannabis industry because these are companies that are not heavily – they don't have a lot of debt, it’s the fastest way say it. So, when you look at enterprise value, enterprise value is effectively market cap and doesn't necessarily include the debt load because there really isn’t any. And so – but whether its EV to sales, whether its EV to EBITDA, I think, you know, you're looking at – on a 2019 basis, the average of the Canadian companies is about 8.5 in 2019 on EV to revenue. It's about 3.5 on 2020 EV to revenue. On EV to EBITDA, it's over 100 for 2019, and for 2020, it's about 13 and for that I could be looking at any of the big brokers who are out there I think doing a pretty good job in this space.
In terms of the U.S., EV/EBITDA for 2019, 2020, you’re kind of first of all 2019, which I said in Canada was over 100; in U.S., it's about 41.5, and by 2020, it's down to 6.5-ish. EV to revenue, 5.3 times now versus 1.9 times, two times roughly for 2020. So, US is trading about 40% cheap to Canada. You know, the irony is, of course, that as the markets gone, this – due to this major correction, U.S. has corrected with Canada and hasn't necessarily been any more resilient despite a valuation difference. It’s, you know, substantial. You have seen and you talked about the bounce in the last month, some of these bounces in the last month is a function really over – actually a handful of companies actually coming out with pretty decent numbers, especially in the U.S.
So, in the last four weeks, five weeks, [indiscernible] TTI, Cresco Labs (OTCQX:CRLBF), you know there’s been a whole series and whole parade of releases that have been, you know, pretty interesting, and in many cases, actually quite constructive. I thought Cresco Labs' numbers were excellent, but truly these numbers were excellent. I thought [indiscernible] look to profitability, you know, is very interesting and I think they’re topline for next year is going to be extraordinary. So, that's where we’ve come from on valuations and we’ve come from a place where the expectations were too high. The companies did a poor job of forecasting their businesses, get back – getting back to corporate governance whether it's intentional or whether it's, you know, purely just, you know, pure assessment of your business. If you can't measure your business, how can you manage it?
So – you know, but it's not an easy environment to do that, especially based upon how the companies are set up and how they have to vertically integrate in many cases state-by-state in the U.S. and duplicate what they're doing in California versus what they’re doing in Massachusetts. And so, you know, I think at some level people are giving the companies a pass on some of the profitability metrics, but clearly, a path towards profitability is something that investors need to see, and there needs to be a structural argument for profitability for a lot of the companies in this space and that's – you know that's something that I think is also where investors need to do a little work here because there are a lot of companies that have made major investments into production and cultivation that I'm not sure they are ever going to see that money in terms of free cash flow generation out of those projects.
You have a lot of companies who – really 2019 was supposed to be their hockey-stick moment in terms of the revenue spike and I’d say in case of a lot of them, you know, you really have seen it. In the case of a handful of them, you really haven't. In the case of, you know, a couple companies who raised a lot of money, they now are only coming online in kind of 3Q, but really 4Q, and it will be critical for them to actually deliver in 2020, and with the nature of where the capital markets are now, and I mean very restricted still, and not a lot of new invest – you know kind of institutional capital coming into the markets. It's – you know, there are going to be companies that don't make it. There are going to be companies that have trouble with that bridge to the other side for, you know, what – whatever capital markets are going to be friendlier for them.
I think the – you know you haven't seen any new capital come into the market for a long time. There's a lot of deal fatigue, a lot of the same investors are stuck with companies that they’re well below the high watermark. There's, lockups that are coming undone. There's, you know, clearly look without profitability, these are companies that continue to eat cash. So, you know, finding companies that have a pathway to profitability that is showing free cash flow, and again, you know, the good news for the sector is that you saw companies in the last month that really, you know, have delivered on that and that have shown, at least, adjusted EBITDA that was actually positive in the second quarter.
JL: Yes. no, sure absolutely. In terms of the disconnect between the expectations that, you know, many of the companies in the space have for themselves and have articulated to investors, which has led to just further investor disappointment when they simply can't match the height when they actually report their quarterly earnings numbers. That seems to go well beyond these individual companies, so you have, you know, extensively objective people like to avoid writing – you know, projecting the size of their Canadian Cannabis market, for example, and the lead up to legalization, which they just totally got wrong. I think they basically missed, you know, widely across the board on every single province [indiscernible] one province that they projected correctly on, but – so what do you think it is that not only these companies, but people on the outside also got wrong with their outlook and projections for this space and the lead up to legalization in Canada and in places like California to some extent also?
TS: So, I think, you know, some of the mistakes on projections are made because of the inability to forecast some of the regulatory, you know, bottlenecks and some of things that are – you know, should have been expected in terms of the roll-out Canada.
JL: Are you saying – it’s not only regulatory, I mean there’s things like, for example, the persistent of black-market purchases, which I don’t think…
TS: Sure.
JL: …were sufficiently taken into account either by Deloitte or by many of the growers and cultivators and [LPs] either.
TS: I think you’re right. I think may be its impossible to have had the – you know, the comparison set to assess a black-market transformation into a fully regulated legal market without going back to prohibition or…
JL: I was going to say, yes, you might have to go try that, you know, dredge up alcohol companies that went public again in – probably not in the 30s with the market in the [take] probably tool a while.
TS: That’s right. Yes, and we were probably still enjoying our speak easy spec then, Jonathan.
JL: I’m sure.
TS: You know I mean we’re probably – it was probably a better time to be living in the shadows. You know, if you think about it, it’s never been a better time for the black-market. You’ve changed national perception, you’ve changed global perception about the drug, or you know, the effects of the drug and you’ve increased awareness. You’ve started to make it kind of sexy and you’ve raised prices for fully compliant regulatory following companies because of a tax structure that is, you know, has much to do with the people voting as it is. The legislator saying, I can actually see the dollar signs attached to the taxation here.
So, we haven't found a happy medium in terms of where taxation is. We haven't found a happy medium in terms of the regulatory environment, which is going to, you know, allow real players to actually run and be profitable. Obviously, we’re starting to get into things related to, you know, Section 280E in the United States, which is – for folks who don't know that, I mean that’s just, you know, that’s related to the accounting for anything that's got a Federal criminality attached to it; it means that you can’t subtract standard cost of goods sold. And so, for retail businesses in the sector, I mean they are structurally unprofitable, and therefore, when the black-market and the illegal shop pops up across the street. I mean, who’s going to be more successful, who’s going to have better pricing, who’s going to be able to undercut the market. And in some cases, with some of the same brands because…
JL: Yes.
TS: …what we found is that some of these brands are slipping into the black-market because there's a huge supply coming on, guys have to sell it somewhere. Now, I don't think that the industry on the whole is doing that. I mean the industry on the whole is rightly getting out there and being, you know, very righteous about regulation and wanting it and embracing it. But the regulation hasn't been terribly thoughtful in some cases, and the regulatory [keep] to enforce even the black-market and to go after the black-market. It doesn't seem to be following through with the regulatory landscape that actually made, you know, made it possible for companies to begin selling openly. So, back to your projection and assessment of the size of the addressable market versus what's been delivered, you know, I think these are part of the growing times, pun intended, I guess.
JL: Yes, they’re good.
TS: They were good throughout those things. But you know that's part of this. I think, you know, I was – I met with a company in the portfolio earlier this week who is assessing the size of kind of the Canadian market in pre-2.0 and post-2.0 terms, 2.0 the derivative market for Cannabis products in Canada, that’s going to be now coming into the market in the late fall.
JL: Sure. You were talking about things like the beverage market I assume and things along those lines.
TS: Yes, edibles.
JL: Yes, edibles, yes.
TS: Different formats. And so, the companies themselves are looking for new life, not only from higher margin products to be clear, significantly higher margin products, but also a larger addressable market. I mean I think that's, you know, that's – you know so, what I'm hearing from the companies is, this goes from, you know, probably realistically $1.5 billion market down from what? I mean what? You know at some point this was – you know, Canada was being talked about as a $5 billion market, but that it doubles with the derivative products with Cannabis 2.0 to a $3 billion market.
JL: Yes, I could see that going in further just because I think there is – while Cannabis itself has become destigmatized in many ways, I think the idea of having to smoke something is still fairly stigmatized, whereas ingesting something in food or beverage form is something that people have been doing to unwind you know, on the weekend or when they want to let the – take the load off and hang with their friends and I think that makes a big difference if you can open – you know crack something open, and you know, your friends are going for a beer and you’re drinking a Cannabis infused beverage versus having to actually ingest something in smokable form.
TS: Yes, I think that’s right. And so, you know, those are exciting developments and – but, you know, in terms of the other side of mis-assessing the size of the market, whether it’s Canada, whether it’s globally is that, I think, we really have no idea what the total addressable market is and that includes the combination of the adult market, the medical market, and then, we start to get into the wellness and lifestyle markets, and the OTC markets. So, because if – what I want to believe as someone that’s kind of studied consumer products, demographics, and consumer behavior is that with the perception change and certainly with the mechanism for being able to make these purchases and make purchases in the same way you’re logging on to Amazon to buy anything or you are getting, you know, Grubhub delivering you anything is what's going to happen with the consumer class in Cannabis, and it’s going to be the more exciting, obviously, demographic size. By the way, it's not necessarily any particular age group, it's really just the crossover investor.
Obviously, let's call this of a legal age, but that who is slowly coming over the wall, and doing it because they now have predictability, consistency, safety, and a poor understanding of truly the product that they’re consuming. I think that's the most powerful part of the addressable market that we still have no idea on the size of it. I think people are speculating and trying very hard. If you listen to, you know, New Frontier data who, I think, are one of the, you know, the talented groups collecting industry data and doing a lot of projections, you know, they would make an argument that right now, globally between adult, medical, illicit – and illicit, you’re at about a $450 billion market globally. So…
JL: Yes, that's…
TS: That’s enormous.
JL: Yes, that really is.
TS: And I think – put it this way, I drink Coors Light not because I think it’s the greatest tasting beer, but because, you know, if I want to five or six, and you know, maybe if it’s a long Saturday watching football, out at the barbecue smoking a brisket, maybe it’s more. You know, I mean it’s micro dosing, right. It’s – I think a lot of people who are “meditating” themselves in this world with a number of different products, obviously, in the alcohol world and also in, this funny stuff OTC, that's effectively doing the same thing. That's the preferred approach. Anyway, you know, I think that's the most interesting segment of the market.
JL: Yes. no, definitely. So, I guess moving over to where, you know, we can start to see the topline and bottom line growth really grow here in terms of addressable market size. U.S. is – the U.S. is clearly the largest potential market, but it's still relatively difficult because of its Federal status to profit off of that via publicly traded companies, and you know, I just took another gander at what you’re holding in CNBS and it really is very heavily weighted towards Canadian producers and other companies in the space just based on the fact that they are the largest by market cap right now, but again, Canada is really a pretty tiny addressable market size.
So, first of all, how are you getting access to U.S. markets in CNBS? Are you able to even? And then, when do you think, in your estimation, we’ll actually see the ability for investors to profit off of markets well beyond Canada via publicly traded companies?
TS: Sure. Yes, these are important questions for us because to me, you know, the portfolio, as it exists now, is not fully representative of where we want to be. So, right now, we’ve invested where we can invest. And so, we’re investing where we have a federally legal dynamic. And so, that's clearly Canada; there is Israel; there is Australia and there's some Latin American opportunities. And then, to be clear also, you know, we have kind of – I’ll give the audience just a breakdown of really our three kind of sleeves and then we’ll get into, you know, where are they located and what not. I mean there are three classifications in the fund.
One is, you know, the largest – you call it Cannabis and hemp plant, and then into – that can also include pharmaceuticals, biotech cultivation, and retail and that's hemp products and Cannabis infused products. The second part is the agricultural technology or real estate or commercial services serving the industry. And then, finally is ancillary and that would be hardware, so consumption devices, mechanisms, investing and finance, and then, technology and media. So, you know, that's how I see the world broken down, and to be clear also, we need to have 80% of our portfolio – sorry 80% of the portfolio needs to be with companies that have more than 50% of their revenues coming from Cannabis. That’s how we can saw Cannabis in the name. That's how we think we’re supposed to be.
JL: Sure. Yes, I mean otherwise it’s you see that with so many different funds where – I mean one space I think you really see this is in block chain fund space where so many other companies and their portfolios, companies like Facebook (FB) and Microsoft (MSFT) and IBM (IBM). I mean what’s their actual exposure? You know I understand there’s a commitment for them to expand – you know they’re users of block chain technology, but realistically if IBM has a [indiscernible] quarter because, you know, somebody eats their lunch in the cloud computing space, they’re going to have to sell off totally, you know, unrelated to the relationships with [indiscernible].
TS: Yes. It’s good to know we can say [shitty] on this podcast too?
JL: Oh! yes, you can.
TS: No, it’s refreshing. There is no question that investors and accountants fund want Cannabis companies. They don’t want tobacco companies; they don’t want fertilizer companies.
JL: No. So, no Scott's Miracle Grow in your portfolio?
TS: No, and – you know I mean, it’s good for [Scotts], but that's –you know that’s – it's not a meaningful part of their business right now.
JL: Yes.
TS: So, that’s our – you know that’s our gospel, and – but to be clear, right now, it's a case where we have more Canada than I think we should have in the scheme of a global marketplace. We have the ability to invest in U.S. companies that are not violated the Federal constructs. You know, we can own a Charlotte's Web (OTCQX:CWBHF); we can own companies that are involved in the ancillary. You know, we own a technology company who effectively runs a CRM that is in actually some sales software that effectively is one of the industry leaders. And we can own companies that have REITs, that have, you know, the real estate dynamic at work; can own financial companies and we’ll get a little bit more into the portfolio, but I think there’s two things to think about here.
One, we will – my guess is, we will be finding a way to get synthetic exposure out there to U.S. companies. We’ve been reluctant to do it, because again, as a purity factor of an ETF. A lot of times, people look under the hood of an ETF, and they’re like, Oh! Well, I didn’t know I owned that.
JL: So, by synthetic I mean, I know that, you know, there’s other funds that, for example, will have exposure to swaps, which should roughly give then the returns of specific U.S. companies, that's the kind of thing you’re avoiding I guess, right?
TS: A total return swap, but…
JL: Yes.
TS: …but before I do that, I’m going to make sure that the regulators say that that's okay.
JL: Yes.
TS: And I still think that this is an area that hasn’t been approved yet. I think the obvious goal for the industry is to have it be able to be banked appropriately. So, SAFE Banking Act, which – you know, we can talk about that for a second or we can talk about that later. I did – you know I'll let you tell me what you want to do, but I think that's something that's going to open it up for us.
JL: Yes, I think you’d probably get into it now briefly, I think. I think it makes sense.
TS: Well, I mean the two or three biggest legislative moments for the U.S. market that are coming down the path are obviously going to be a SAFE Banking Act and, you know, some type of a [States Act], which is, you know, again giving – going to give the states the ability to have the companies that people have voted to legally be able to operate in this industry, do what they do, and then to be back. You know de-scheduling from it being a drug on par with LSD or heroin is something that I will not come until we’ve begun this process legislatively to, at least, be able to bank these companies that have been voted in legal.
JL: Yes.
TS: There’s some debate as to whether if a company can be banked by a – you know, a Fed system bank. Can that then allow them to be listed? I do think that from the companies who are looking to borrow and actually raise capital – debt capital, this will be enormous catalyst for the U.S. market, and I do think that there are companies that will, you know, benefit greatly because there are companies also that have tremendous asset basis and can borrow against them and can show a very vigorous topline growth. And I think so the SAFE Banking Act is something that I think is closer than people think.
In fact, having discussions in the last couple weeks with a number of folks in DC and just some of my network there, there's, one, been some sense that the Senate is going to move ahead of the House on this, and that you could see and if you listen to Mike Crapo, who essentially has been monitoring the Senate banking hearings, that there – you know the tone here is changed so dramatically in the last six months in terms of a very conservative republican who at one point, not in his lifetime, and now he’s saying, if this is what the people want, it’s going to happen. But democratic leadership is getting SAFE Banking Act ready for vote on the House floor next week, September 23, I hear.
JL: No, interesting. And yes, you would think enough republicans would be, you know, states’ rights type people to come along for the ride here.
TS: Yes, its – I’ll not talk politics…
JL: Yes. no, I don’t want to get into politics either. I’m just saying traditionally, they’ve been the ones to [multiple speakers] the states’ rights arguments.
TS: No, no. and I – it’s easy to digress for me…
JL: Yes.
TS: …into – you know I'm not sure what this administration falls under the category of, but you would think that states’ right is a fundamental dynamic here that should have Cannabis be something that really falls just under – you know, if this is what the states have voted for. What I think people know at this point is that not only, you know, 98.6% of the country lines date permitting some form of Cannabis, but that, you know, this is a total bipartisan political issue for now and certainly for 2020 and beyond. 68% of the house represents medical or [indiscernible] states. You know, what I'm saying is that 65% of the country are ready for de-scheduling. So, the numbers are out there and SAFE Banking is something that I think is really the first step. And if – and again, I mean watch next week. If it comes up for a vote under the Suspension of Rules Act, which would mean it would need a two-thirds majority, but it would also mean that the bill the leadership brings up would not be subject to amendments, and you know, the House leadership doesn't want the bill to be amended to include provisions that would be objectionable in the Senate.
So, this is kind of [jogging] between the House and the Senate. And I think they’re – you know this is a case where they both want the political football. And so, what I think investors are missing is that the top down regulatory landscape is actually going to be very bullish, I think, in the next 12 months. I know vaping is a – these are terrible headlines; these are terrible things that are happening and there’s a whole lot of review of what needs to go on there. But this isn’t setting the industry back. The other thing that's been very positive in last couple of weeks is you’ve started to see the natural fall through in the progression of the M&A calendar go through the Department of Justice.
So, there’s been an HSR review, which has been holding up some of the biggest M&A transactions of the last year, and those, by the way, that move the markets dramatically. I mean, you know, for example, Cresco Labs and Origin House. You know in my conversation with those folks, first of all, they are very complementary to the DOJ saying, hey! You know they’re following a process, which means that they’re – they’ve take a very sophisticated approach to the sector and that, you know, they – you know there's nothing procedurally that they’re doing that they shouldn't be doing, and that ultimately this is showing that there’s going to natural fall through, and we’ve already started to get it.
So, the hold up in the M&A was something that the industry was also began selling off on in the summer. Getting some of these things through the queue and we – the MedMen (MMNFF) deal early last week, getting HSR fall through is the first sign I think these are starting to clear through the queue. So, those are some positives. We ultimately, in the fund, want to be investing. So, back to we want to be investing where the industry is, you know, going and where the industry is. There’s is no question that the U.S. market is the biggest in the world. There’s no question that having exposure to some of these companies now is not as easy as we'd like it to be. But, you know, there are a couple of companies, for example, that we own that not only are giving you that exposure, but, you know, we own – we have pretty good size position in something called Canopy Rivers (CNPOF) and that Canopy Rivers is effectively an investment fund.
30% plus of that investment fund is in a company called TerrAscend (TRSSF). TerrAscend, to me, is one of the best run, and you know, most impressive North American operators out there. It's – it has Canadian assets and has Canadian population and production as a farmer grade production facility, but it's got arguably the most, you know, decorated/critically acclaimed and some of the most high-yielding dispensaries in California, The Apothecarium brand, they’ve made acquisitions in Pennsylvania, they’ve been selected. So, anyway, you know, I can own companies like that through a Canadian structure. I can own a Charlotte's Web; I can own technology companies, and I think it's a matter of time before we’re going to be able open and be investing in the U.S.
JL: Yes, sure. No, that’s – that makes a lot of sense. So, I’d love to move over to the specifics of how you go back constructing CNBS here. How do you value stocks in this space exactly? And what are the comparable business models to look at? Are you thinking about stocks in this space along the lines of agricultural producers, biotech companies, alcohol and spirits or some combination of them?
TS: Right. So, we started to talk a little bit about just, you know, from a traditional investment metrics and how one might look at, you know, what are the evaluation, you know, ratios investors should look at. So, I want to spend a lot of time…
JL: Yes, sure.
TS: ...and obviously again, if we’re talking about growth companies, we’re talking about a case where you've got a sales dynamic that's the most important thing to see right now. So, you know, I definitely do care about price of sales, I do care about profitability and certainly the adjusted gross margin is something that companies have been started to be compared to each other by and I think it’s – that's very relevant notably. I mean, look at the adjusted gross margin for Canopy Growth (CGC) and versus that of Aurora (ACB), and, you know, we can talk more about, you know, when I think of those two companies.
JL: Sure, yes. Considering they’re your two holding I think we definitely need to touch on that for at least several minutes of time.
TS: Yes, so – but before doing that it's very clear that the sub-sector investing in the sector is something that is really critical to asset allocation. You’ve got certain parts of the sector that just aren’t going to be profitable, and getting it cultivating, you know, the overall kind of core ag business, not very interesting. And in fact, my emerging markets background, I can't tell you a case of really where there were any, you know, enormous agricultural, you know, producers, cultivator plays that were great investments. The great investments were the processors and the folks that were using, you know, various forms of agricultural technology to distinguish themselves or to enhance the output or enhance the quality or change the characterization of the underlying product of the core cultivator.
So, those are companies that I'm trying to find. Right now, there’s a bit of theme in the portfolio we’re actually like the extractors. I like extraction. I think it's a part of where the industry right now is actually seeing some pricing pressure, but not like you're seeing in cultivating and the handful of companies that I think are really starting to distinguish themselves and are showing that they could be profitable there. There’s a couple of companies that are also doing some really interesting things and have a background in the innovation attached to not only just extraction, but then, cannabinoid science and seeing where you can bring that into traditional consumer products to, you know, enhance the performance of them. For example, there’s a company I own called Neptune Resources, which is an extractor and which is I think in Canada and they’re – you know, they have U.S. assets as well.
So, we are getting exposure there. But to the extent that these guys are looking to innovate traditional consumer products, while they are doing their blocking and tackling and core extraction and that means finding cannabinoids that when combined with say deodorants are going to change the – you know their performance and be safe or not have some of the just, you know, some of the issues, you know, irritations that deodorants might have or in toilet paper, or you know, things that are big, giant consumer product. The CEO there actually is a guy who comes out of the consumer products world and did a deal with Unilever (UL) (UN) and basically sold into that chain and understands kind of how you do that and where we’re seeing some of the – you know just some other form factors begin to change.
So, you know, those are companies that we like. To the extent that we are looking at the biopharma world, and you know, GW Pharma (GWPH) is a name that’s in the portfolio, and it's easy to be critical of this company at some level, the valuation depending on how you value the company may also come on to some questions, but, you know, their second quarter numbers, especially, for Epidiolex of $68 million were – they just crushed the consensus of which is around $45 million and that, you know, you're seeing sequential growth. So, if they grew 100% quarter-over-quarter, and you know, there's a case where obviously you have strong payor coverage, and therefore, pricing for these guys is extraordinary.
I think there’s no real science or stalling momentum other than, yes, I recognize that there's been some concern around the legislative environment, how should we say, in Europe, there’s been some concern that these guys are actually falling under some pressure in the UK and that they still need to get approval from the European Medicines Agency, the EMA. But more importantly, in the short run, the expectations for the company, I think, should be very high, and I think they’re well beyond where they were supposed to be at this point.
The NDA filing for TSC is on track for the fourth quarter of 2019 with approval to be expected in mid-2020. So, you know, I think the EU opportunities is supposed to be, you know, 25% of that in the U.S. with the initial launch focused on, you know, children more versus adults, and there are already 800 patents out there in Europe. So, I think they’re going to get what they need to, but I also think that Europe needs to – if it's slower than expected, that that really changes the story, and again, how should you be evaluating a company like this and I think, you know, part of it is just doing a traditional DCF with a discount rate and a terminal growth rate, but I think if you look at their core business and how they’ve become a $250 million business, at least, if you annualize this right now, I mean that's extraordinary just in Epidiolex.
So, we – you know we like those kind stories. I think, the –you know back to Aurora and Canopy, Aurora’s numbers were on some level should be applauded. They really as an operator, I think, they showed that they are executing, as well as almost any player in the industry.
JL: Sure. And I guess just for people that hadn’t been following it as closely, they are now the largest producer in Canada at this point. I think they had 23% of market share as of their last quarterly earnings. So, they’ve definitely made strides in that regard.
TS: Yes, that’s right. Yes, and so, last week they reported fiscal fourth Q – 4Q19 and stock – you know stock went down 10%. Why did it go down 10%? Well, they just guided a month earlier for revenues in Canada to be, you know, roughly [CAD100 million to CAD107 million]. They came in net revenues at [CAD98.9 million] and what they noted was actually our core business actually did come in line with that, but it was the ancillary business that actually, which is harder to predict and more volatile series, came in last blah, blah, blah. I mean it – you know to me, I don’t care whether it's core or non-core, it's about, again, being able to value your business and assess your business and assess your – how you’re reporting your business and, you know, that to me is where the sector is got to change because this was – this was actually an excellent quarter from an operational perspective.
These were record numbers for the industry. They were record numbers for Canada, and they saw, you know, a big increase in Cannabis harvested, which is, you know, up almost 86% and they are very close to ramping up their total production footprint to close to 38,000 kilograms per quarter. That’s going to put them at the top of the heat. It’s going to put them in a great position for 2.0 that we talked about earlier in terms of the derivative products, and I think, you know, that's the good news here. It's – you know it's actually a company; it really is executing; it’s a company that I think is – their gross margin came in I think at 56%, up from 53% sequentially, although down from where it was last year, but this is in a total contrast to what you’re seeing at Canopy. And so, we’ll say that it actually just in terms of – let me talk about Canopy first and then I’ll talk about how I handle them in the portfolio.
JL: Yes, sure.
TS: Canopy, who announced numbers about a month ago, really had another horrendous quarter with their gross margin coming in at 15% and this is after, you know, guiding significantly higher. This is after a terrible previous quarter where the sense was that they had some one-off factors. I think, you know, the most important thing to know right now about Canopy is, they are also well-positioned for Cannabis 2.0, but clearly, you know, going through some of the integrations that they’ve gone through, I think some of that has slowed them down. I don't – I don't think that there's been any change in the focus of this company.
I don't think there's been any buyer’s remorse by Constellation Brands (STZ). In fact, you know, I met with Constellation Brands a week ago, and they couldn't be more, I think, committed to sector, especially as one of the most sophisticated global consumer products companies in the world, and I think they believe that by going through Canopy, they have the global footprint and they have the ability to move now, and the acreage transaction is also something that I think they’re very bullish on it. And again, it gives the ability to build the runway now before the full regulatory environment opens up.
JL: Sure. So, you don't – just out of curiosity, so you don’t think Bruce Linton firing was – you don’t it will really affect them in the long run. You think it will be positive for shareholders?
TS: Bruce is a very important guy for the industry. He’s been a very important visionary entrepreneur and representative of the opportunity here, but, you know, it was clear, it's time for the company to take the next step and the next step, I'm cautious that – again, I just spent some time talking up Bruce, so – but I think the level of sophistication and execution around the business clearly wasn't working, right, and I think there's some things there that are independent of maybe the CEO chair other than I expect they're going to appoint, you know, some type of a hotshot CPG CEO that I think is a major driver for the stock.
I think this is a sign that it's time to – you know, we talked about 2.0 in Cannabis, it’s time for 2.0 Canopy Growth and I think Canopy Growth is going to move. They’ve got $3.1 billion in cash to go make acquisitions at a time when there is, you know, growing extreme pain in the industry and they can make very aggressive acquisitions whenever they find them and at much better pricing than they could have a year ago.
JL: Yes.
TS: In other words, I think they are going to be a very effective buyer here in a world where I think all the Canadian LPs overspent for assets over the last couple years. I don’t think they’re going to do that going forward. In fact, I think they’re going to be a little exact, very strict, and you know, very competitive pricing out of whatever targets they go after and that kind of a cash file in this industry right now, I think is arguably the most important thing, and with the management changes and having had a chance to meet with Constellation and understand their commitment and the level of sophistication there, I actually took the weighting of the stock up in the last week in a portfolio after I met with them and kind of got this sense of a vision that is, if anything more focused than I think the market expects. As far as Aurora goes, because of, you know, where both Canopy had traded down after their numbers and what not, but I mean Aurora going into their print, I actually cut the position a bit going – it was the biggest position in the portfolio…
JL: Okay.
TS: …kind of at the start of the week and I actually cut it a bit going into the numbers just because I – you know my sense was they were really out there with a number that was going to be what the market already got and – but frankly, just – really just a case of – not major moves, cut by 100 basis points the position and, you know, reallocated a little bit more to Canopy, but, you know, look, those are still two of the most important, if not, the two most important companies in the Cannabis world right now.
I'm not investing on a market cap weighted basis; I’m not investing on a revenue, you know, adjusted basis, but there's no question that right now based upon where the industry is, those are company that are going to continue to be players and I think consolidators in this industry. I'm quite pleased with the operational, you know, fall through it at Cannabis assuming at Aurora Cannabis, and as I said, I think the argument that Canopy Growth is still the best positioned company in the sector is a very easy one to make. So, you know, that’s – and in terms of portfolio management, and you know, active and what is active, what does that mean, how – you know how much am I moving the positions around?
You know, I would just say that unlike my hedge fund days where I was very tactical on a day-to-day, minute-to-minute basis, I'd say, you know, my goal is to constantly meet with company managements, get a sense of – if there’s a name that I want to go on the balance sheet, you know, what are – you know what are the drivers? What are the catalysts? But also trying to understand where – you know if a company like Charlotte's Web, which ran 40% – actually close to 60% in the first three weeks that, you know, we had the fund open and it went from a starting position of about I don’t know 4% to ended up being close to one of the biggest positions in the portfolio, you know, that's a case where, you know, both just as a function of rebalancing, but really just to look at where the portfolio is concentrated. I cut the position back down to 3.5 and somewhere in the middle of two weeks ago, we actually added to the position.
We were getting some pretty good flavor on both some of the roll-outs that they have in a handful of states and just the size of the CBD market and the stock had underperformed. So, we can be nimble. I think one of the great things about an active manager is, you know, we don't have to own anything that we don't like. And so, we’ve never owned CannTrust (CTST). There is – there have been moments where it looked like, wow! Really oversold one point. These were great assets. It was a real company and despite the compliance of headlines, hey, do we need to own it? Well, you know, I haven't really ever felt that we needed to own this company based upon the risks around it.
Something like Greenlane (GNLN), which is a company that – was one of the more recent NASDAQ listing companies, so a U.S. play, a way I could get exposure to, you know, effectively U.S. retail and a deal that was brought by a couple of hotshot, you know, global investment banks. You know, I just never really felt comfortable that their business model was, you know, not overly tied to just some of the form factors in the hardware market that – and really actually it was one or two producers that I thought of. If they lost those folks as clients, the company – it just wasn't really that attractive in terms of their margin. There was a lot of risk there. Well, I mean, you know, we don't own it, and by the way, the vaping crises, it's come up means that this company is really under pressure.
JL: Yes. I was going to say that's pretty pressing of you to not be into that.
TS: Yes, I mean, you know, I did not anticipate what was going to happen in [vape plant]. I just – you know, my view was just that I would actually rather own some of the – you know the top vape producers and there’s one we own in our private portfolio, but the top layer, which I think, you know, well, maybe they got a little cheaper in the last couple weeks. I think the vaping headlines are something that the industry needs to be very concerned about. I think the – you know the reality is that – the state – you know the state regulators and we saw this in New York State just yesterday on E6 and I think the regulatory response for the – you know the easier role has been clear swifter and more broad because it's bigger market, and I'm not really sure where this is going to leave vaping and THC in Cannabis products. But the industry is at a pivotal point and the state regulators need to show the Federal government that they have the expertise and the enforcement to produce say products.
And so, I think this crisis is going to further entrench some of the state products kind of silos and it may even, you know, pushback on some CBD products from being offered outside of state regulated Cannabis dispensaries and what not. But I don't think this is – you know I think this is a case where if the industry – that you’ve got the industry basically saying regulate us, and we need as much of this as we can get actually and that we – you know the argument is that a lot of these horrific incidents are coming from black-market related either hardware or oils that are grown with pesticides or heavy metals that are heavy metals from the hardware. So, anyway, I think, you know, that’s just my view quickly on some headlines that are going to continue to be coming out. I don’t think we’ve – we are no way through this, and as I said, it – this may slow down CBD a bit.
JL: Sure. I guess if people would just vape flower then they wouldn’t really have this issue. Maybe that's the – their solution. So, in terms of kind of positioning beyond the U.S., so I’m – just full disclosure, I’m along Aurora and the – probably the main reason I’m along Aurora Cannabis, but again, there’s a long-term play. It’s, you know, probably the smallest position in my portfolio. I’m generally allocated to, you know, large index funds and had this position before funds like yours and some of the other ones launched. So, you know, couldn’t be revisiting that at some point because I don't generally like taking on single stock risk. But – so one of the reasons I am along Aurora is that my sense is that they are best positioned in terms of the global adoption beyond the U.S. in terms of Europe and Asia, Latin America of the adoption of medical Cannabis.
Globally, they’ve got operations in more than 25 countries at this point and some really kind of big medical distribution deals that they’ve really – you know recently concluded with European countries like Italy and Denmark. So, I was just curious, you know, first of all if you shared that assessment for them, and then, which other companies in this space you think are best positioned for a global growth story beyond just Canada and the U.S.?
TS: So, there’s no question that a lot of the Canadian LPs have positioned themselves as global players and there’s no question that, you know, that that's had a lot to do with their ability to, you know, rationalize valuations that they weren’t possible to be satisfied through the addressable market or lack there out that we talked about in Canada earlier. I do think Aurora is well-positioned globally as anyone. I think – you know, I met two weeks ago with a Macedonian producer and Macedonia for those of you that understand, you know, politics from that part of the world now being called North Macedonia.
JL: I was going to say my – when I was in Athens a year and a half ago, the cab driver I had was incredibly [indiscernible] and I kept referring to it as Macedonia. It was like a cardinal sin.
TS: And – but, no I’ve learned more about that then I thought I needed to know. But this is a case where this is…
JL: Yes.
TS: …a member of the e-community that is incredibly well-positioned to be exporting it to the core EU and doing it with, you know, real competitive advantages in terms of the growing conditions and the labor force. So, people are looking to Southern Europe for opportunities there. Aurora has got a – you know they’ve got one of only a handful of real production in Macedonia that has made it through licensing process and is attractive. They are – yes, they are well-positioned throughout Europe, at least to be a GMP EU approved exporter. I do think the excitement around Europe is warranted given the size of the market and the level of, should we say, thoughtfulness towards legalization and I think just general probably they’ve at times been ahead of the rest of the world in terms of their acceptance of Cannabis.
JL: Sure. Not to mention, I think many of these countries because they have nationalized health are likely to start actually paying for medical Cannabis in many cases. So, that really could increase the addressable market size in significant ways because you now have the government buying it for medical consumers essentially.
TS: Yes, and nothing else. It will certainly support pricing right, so – and Germany, especially that’s the market where you are getting the buy-ins of the medical community, but I think this is going to move slower than people expect, and I think – you know that's the one caveat to this. I do think also that the understanding, the regulatory environment as it relates to the licensing process, the competitive licensing process in parts of the EU, and then, what's required to be fully EU GMP compliant. You know there is some debate around [indiscernible], actually, what they talk about Portugal can ever be exported into the EU.
And so, I think, you know, it is – this is a global marketplace gaining exposure to Europe I think is very important, and I do think that there are handful of companies that are also well-positioned there. I do think Canopy Growth is – I do think that there's a handful of the smaller players that also are positioned in EU. There’s a company in the portfolio called Oxley, which has – it’s a Canadian player that has exposure into the export market. So, you know, I think that – that's an exciting story. I think we are looking at this as a global opportunity. It’s interesting because the U.S. multi-states, if you ask them almost to a man, they’re not really that focused on the EU because they think the opportunity is so big in the U.S. Whereas if you ask Canadian guys, many of them have already made Europe a priority.
JL: Yes, sure. No, that makes a lot of sense. And so, I guess even if it doesn't happen that quickly, again, if you’re in this for the long-haul, it seems like just another thing which will ultimately add to the evaluation sense of companies that are well-positioned towards those very larger European markets. So, I guess before we go here, it would be great if there was one other name that investors are likely less familiar with that, you’re particularly bullish on in this space and if you could just lay out the [bull case] for it?
TS: Sure. Why don’t I go with MediPharm’s (OTCQB:MEDIF) and then the ticker on that is LABS? This is a position in the portfolio that is around 3.5%, so it’s a very meaningful position. This is a company that's also an extractor, which I think is – as you said, not only thematically make sense, but these guys are showing that they’re free cash flow positive. It’s a company that also is exporting into Australia. So, I should say that they are kind of the – the Tikun Olam into Australia, so they are actually going to be licensing and growing those Israeli strains in Australia. They have a, I think, you know a very significant market opportunity, at least, in a smaller market there. But it’s a company that I think has picked their production profile more cautiously and it’s focused more on the higher value-added part of the chain, and I think it’s a company that’s actually very, very cheap relative to its peers on a price to sales basis.
JL: Yes, sure. Yes, and it guess it’s – what’s around $0.5 billion market cap still. So, well, relatively small.
TS: Yes. And I think if you look at that trend in the portfolio, it's not unlike. Once again, the emerging market world where – you know if you look at normal definitions of market cap, and you know, small cap is, you know, $300 million to $2 billion, but a $2 billion company or $1.5 billion company Cannabis is pretty large. You know a $500 million company is – you know of an upside and I think there's some stability in terms of their core business and their balance sheet. It’s still, you know, to us an opportunity where we think there could be, yes, some significantly re-ratings still.
JL: Sure, yes. No, that sense. Anyway, Tim, I wanted to thank you for being so generous with your time here. I think this has been a really wide-ranging conversation. You know, I think listeners will be really excited to get your take on so many different parts of the industry, how you construct CNBS, you know, just the deep dive discussion you do…
TS: Well, it’s my pleasure.
JL: …on a bunch of the companies here.
TS: Well, it’s my pleasure.
JL: Yes, and that was great to have you here. I was wondering if you just kind of wanted to leave any concluding remarks in terms of where you see the industry heading, and you know, maybe how investors should be thinking about all of the volatility that they’ve seen here relative to how good things could become in the long run in terms of growing their portfolios.
TS: Right. So, again, thanks Jonathan, its pleasure to be here. It’s pleasure to have, you know, a real deep dive conversation on a topic that I think – you know it’s easy to kind of gloss over in superlatives and just, you know, very quick statements about the opportunity. I think people recognize that, but – so to talk about it longer term, I think the – you know what we’re seeing in the market right now is a function of a necessary correction in valuations that were probably difficult to justify and I'd like to believe we’ve kind of highlighted that. I’ve tried to highlight that all along on CNBC. But I think you’re also just seeing a lack of new capital, as I said, coming into the industry in some deal fatigue, and you're seeing the capital of constraints catch up to a lot of companies.
It’s just part of the reason you’re seeing valuations move where they're moving is you actually have had to see a number of companies rush to market and raise more capital and do it in not terribly attractive terms, and whether it's a convert deal or whether it's a [bought listing] down 10%, 15%. Even some of the biggest companies in this space have had to go through that and even some of those that have been performing very well in the last couple days. So, once again, I, you know I draw your attention to Cresco Labs, which has gone out there with that deal this week. So, I think some of the pressure here is in contrast to really the development and the sophistication growing for the operations of some of these companies like Cresco Labs.
I think investors need to be finding the best management team that are, you know, not necessarily swapping together a business that looks like it's got scale, just to say, have assets in 12 states. You want to find companies that have a cohesive strategy with – you know where they’ve grown through acquisition, where they’ve picked partners, but not only are complementary to the business, but to the culture and that also are companies that are – have assets that makes sense. You know, I think there's a lot of these deals that were done before with overpriced stock because it looked to be accretive because you're using a stock as a currency that was overvalued.
Some of the best deals that are being done right now are being done by companies that are, you know, effectively make these earnouts and making them a deal where there are some cash exchanged early, but really as a function of revenues. There’s going to be a payout out in the next couple years, and I think that’s the smartest way to be investing in the sector because it kind of forces, you know, those companies to who are acquisition targets to really deliver and allows it. Some of these asset purchases can go through it at better rates right now, but if they’re – you know if they’re grade assets, they’ll pay according for them.
So, I think – you know that's the view that the exciting thing here is, this is a new asset class. This is going to be something that you’re going to be hearing a lot about the ability to invest in. It's going to get a lot easier, but it’s going to get more sophisticated, and for most people, this is not going to be 10% of your portfolio. This is going to be, you know, 2% to 3% of, you know, some – I think some part of your, you know, call it more discretionary part of your portfolio.
JL: Sure. You kind of satellite where people can play around at the edges, but aren't necessarily putting their, you know, future retirement at risk or anything and that means…
TS: Well, yes, and I think – no you definitely don’t want to put it at risk. I do think you can have some exposure to the sector that really is to, you know, put it in a place where it's in a high-growth bucket and – but it needs to be a sensible part of any allocation, but in terms of the overall size of this market, it's going to be more than meaningful. It's going to be can – if you look at the size of the spirits market in the United States, if you look at beer, wine and spirits, it's around $180 billion. So, we threw some numbers out there before, you know, you know how many beer ads you’re in and [indiscernible] with.
JL: Sure.
TS: You know what’s going on in that sector and think about the size of what we talked about this market globally. This is very real.
JL: Yes, absolutely, and not going anything, that's for sure. Where’s the best phase for people that want to do more research into CNBS online?
TS: Yes. So, what I – I think we’re doing something that I am really proud of. We’re doing a weekly kind of audio blog more people can go. So, if you go to the Amplify site, I think it’s cnbs.amplify.com.
JL: Yes, I think it’s a – so I think its amplifyetfs.com/cnbs, yes.
TS: Perfect. I think there is – I should – this should roll off my time. So, that will get you to the page where you’ll see our audio blog and you can listen to our audio blog I should say. And we’re trying to keep people investing in ETF, but really people that are just investing and interested in the sector up-to-date on kind of the three elements of what's going on that week, which include what's going in the macro regulatory side, what's going on in the capital market side, and end-markets overall, and then, three, how we played in our portfolio. So, I hope that that's a place go and even if they’re trying to learn more about investing in the sector. You don't have to invest in the ETF. Obviously, the nice thing about an ETF product is this is schematic and it's there to capture the – you know the entirety of this investment trend and do it with, you know a portfolio manager that's focused on these companies every day and meeting with these management teams.
JL: Yes, sure. And then, you're also active on social, so what’s your handle on Twitter? What’s the best place for people to follow you there?
TS: Yes. I’m pretty active on Twitter @timseymour. So, please – please go to my Twitter site and I will engage you. And then, also on LinkedIn. Seymour Asset Management is on LinkedIn [indiscernible] where we’re also posted articles and kind of thought leadership pieces that we like.
JL: Sure, that’s great. Anyway, again, wanted to thank you. This has been really awesome.
TS: Thanks, Jonathan, my pleasure to be here.
JL: Yes, hope we can do it again soon.
TS: Great.
