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Today, I am happy to be joined again by Alan Brochstein, our first repeat guest. Alan is the founder of 420 Investor, an online community for investors in the cannabis industry, and NCV Media, the company behind New Cannabis Ventures, a curated and original content site that focuses solely on the cannabis space.
We review 2019 in cannabis and discuss Alan's vision for the cannabis space in 2020. We cover a lot in this episode from the MSO space to the prospects for the SAFE Banking Act passing the Senate, the sector wide capital crunch and why that's a main concern for 2020.
Topics include:
- 3:37 - Thoughts on SAFE Banking Act. Alan is encouraged by its passing in the House but doesn't see it passing the Senate and thinks there are enough workarounds for capital that its passing isn't essential for the success of the industry.
- 9:30 - Should social equity come from the companies and not the regulators? Social equity components of bills tend to slow down federal regulations. Social equity components should come from state and local levels, not federal.
- 10:10 - Reducing sector-wide capital crunch. Capital started to slow this year. It was still there, but the price has been horrible. Cannabis is a capital intensive industry - when you're building and growing, you're going to have losses. There are still deals getting done, but dilution is an issue. Excited about Illinois and Michigan but can't predict capital concerns will be resolved. Tempering investor expectations. Cash flows justify the prices for the first time. Canadian LPs need to get to cash flow positive. 2020 outlook is contingent on cash flow.
- 17:50 - Encouraged by the positive earnings from the MSO space. Federally legal brings a premium valuation. Election in the US brings an element of risk - will the next President be favorable for cannabis industry? Canadian financial results have been disappointing. Spending way too much money and making investment mistakes. Despite the adversity in the US, the state by state model has been growing. MSOs are close to or actually profitable - doing better than the Canadian LPs.
- 21:22 - Cannabis 2.0 launching is a positive but there hasn't been a worse situation than the way Canada rolled out legalization. They should have opened up dispensaries before they legalized. Lots of roll out lessons learned - Colorado's was quite good. Lack of retail distribution and scaling challenges.
- 24:45 - Aurora (ACB), Canopy Growth (CGC), Cronos (CRON), Tilray (TLRY), and Aphria (APHA) are the 5 Canadian LPs. Differentiating between business models. Lots of cash from strategic investments but also a lot of debt. CBD/hemp market has gone from promising to frightening - it's unclear if those investments into the space will pay off.
- 28:40 - Hemp/CBD public companies reported down (or flat in the case of Charlotte's Web (OTCQX:CWBHF)) quarters despite the popularity of the products. The FDA warning of the dangers in CBD doesn't sound like they're about to make it easier for companies to produce and distribute to consumers. Some experts think the back half of 2020 will be when we have consistent regulations, but others think it will be a few years. Concerning for companies that are banking on CBD/hemp as a catalyst for growth.
- 33:20 - Vaping issues. Industry has greatly improved and this crisis will improve it even more. But mostly an issue with the illicit market; the crisis is over and shouldn't negatively affect companies or growth in the vaping sector any further.
- 36:10 - Cannabis ETFs. New entrants in the space have been horrible - it's a sign of the top when there's so many new ETFs coming in. The bottom will be when ETFs start folding. Heavily skewed toward Canadian LPs and there's better places to be.
- 38:05 - Outlook for 2020. What's encouraging and discouraging? Alan wishes he was more positive, but Illinois going legal is very encouraging. IL is opening up with more stores than Ontario has right now. MSOs will benefit from growth in legal states. Bodes well for the long-term. Cannabis 2.0 and retail expansion in Canada also reason for optimism.
- 43:00 - Why Alan is down on cannabis/CBD drinks. Beverage products are expensive and hard to buy. Only when they can be purchased at bars and grocery stores will they really be worthwhile products.
- 44:50 - Global developments and challenges. Was excited about Australia and Germany but hasn't worked out the way people thought. Widespread global excitement is premature.
- 47:40 - General advice for investors and prospective investors. Alan called a bottom in late June, didn't see massive decline coming that was sparked by the CannTrust (CTST) debacle. Called a bottom in early December, stock prices usually bottom out before the end of the capital crunch. Investors still need to be cautious. Limit the amount of money you put into the space, but things can move very fast. A loss can quickly become a profit. Understanding cash flow, access to capital, strength of management are essential at this point when looking at which companies are worth investing in.
