Todd Harrison on Cannabis Industry Resilience and Investing Amid Regulatory Shifts

When the markets turn turbulent, it's the steadfast who not only endure but emerge with stories of resilience and integrity. Today, I'm joined by Todd Harrison, a Wall Street sage with over three decades of trading under his belt and an unwavering advocate for the cannabis industry. Our conversation takes you through the thick smoke of regulatory haze into clear insights on the current state and future of cannabis investments. Todd's personal narrative of discovery and advocacy post-9/11 provides a poignant backdrop to our exploration of this green frontier.

Peering into the ever-changing landscape of US cannabis markets, we tackle the complexities of state-level legalization and the monumental shifts in investor psychology that have seen a deluge of capital flow into this burgeoning sector. Todd and I dissect the implications of federal legalization, particularly the fine line between Schedule I and II classification, and the rippling effects of the Garland Memo. We venture further, forecasting the emergence of dominant industry players poised to captivate institutional investors, while also unpacking the strategic movements in a market bracing for regulatory concrete changes.

To cap off our deep-dive, we shed light on the delicate balance of navigating markets fraught with volatility—where integrity is the beacon guiding companies and investors alike through the storm. We reflect on the cycle of sentiment that propels the market's heartbeat and the anticipated rise in stock prices buoyed by fresh liquidity. As we close, it's clear that the narrative around cannabis is shifting from stigma to acceptance, revealing unique investment opportunities in wellness. Keep your portfolios open and your minds sharper, as Todd Harrison offers a treasury of insights in this episode.

Nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. 

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

My name is Michael Guyett, publisher of the Lead Lager Report. Joining me for the hour is Mr Todd Harrison. Todd, we've done these spaces and obviously I know about you, but interesting stuff for the audience. Who are you? What's your background? Have you done throughout your career? What are you and Karlie?

Speaker 2: 0:20

Oh, wow. So hey, michael, you know I keep this part short. 34 years I think now on Wall Street. Started at Morgan Stanley Equity Derivatives moves through the buy side, ended up at Kramer Berkowitz where I was president and ran trading. Into 9-11, saw the towers fall and the people jump and discovered the wellness properties of cannabis and how it profoundly impacted my life and went full bore into that space. Met my partners along the way who have done equal amounts of research, and we've been knee-deep in the space for over a decade now and obviously had its twists and turns. But here we are, did I?

Speaker 1: 0:58

put the MSOS, the advisors, here US Cannabis ETF in the name of this. What is your relationship to that fund?

Speaker 2: 1:05

Yeah, so since they launched I think it was September of 2020, if memory serves we have been an advisor to them. We share our research, we work with them in terms of identifying which companies are best suited for the portfolio and portfolio construction, but it is arm's length. All of those decisions are dance. We speak regularly, but it's flavor on the speech, it's introductions and it's trying to just find the companies out there that are going and have been navigating a very onerous environment, which I'm sure we'll talk about. It's been three years, I think. The US Cannabis MSOS ETF topped on February 10th 2021. So here we are, february 14th 2024. So it's been a long road, but there's a few things going on that probably are of interest to your readers.

Speaker 1: 1:57

And it is because, when I look at the AUM chart on that ETF, out of the game, slowly built up and got to over a billion in 2022, then looked like it went as low as $330 million ish and then really tripled. The AUM has now at around $900 million, so obviously there's a lot more interest and flow that's going into that fund. What's gone on in investor psychology or investor awareness when it comes to cannabis that's caused such a big reallocation to that fund?

Speaker 2: 2:29

How we got here, I think is critical to this conversation because obviously in 2020, as we made that high, there was a lot of euphoria around the blue wave and what the implications of that blue wave might be. And, if you recall, that election cycle saw New York come on board, new Jersey come on board, which was a read through to New York, which is subsequently come on board, and all of that state level adoption between 2020 and now, I think is really relevant to the conversation. Maryland, missouri, pennsylvania is now on the clock. We're waiting to hear from the Florida Supreme Court on their ability to let the voters decide in November. So the migration, the inside out legalization of the US cannabis industry, continues at pace. Florida has really tripped up the sector as a number of different delays and regulatory impediments custody being, I think, chief among them, and that banks were no longer allowed to custody plan touching US operators. I started with Pershing in 2019 and it's now subsequently spread across the entire space. So you now have a situation and we spoke about MSOS but you have a situation where there's only really one scalable pipe for most people to access the space I'm saying most people to access the space, and that's MSOS. But the underlying securities were trading by appointment not too long ago. So what changed? You asked it and sort of that embedded psychology in that three year bear market and the duration and the depth of that bear market. I think MSOS was down 92% from peak to trough and we got in late August it was actually the last day of summer we got a headline that the HHS was reviewing a cannabis and that got the space jacked up. It ripped higher and then came back and retested the whole move on much lighter volume into the December and since then we've worked our way higher and that was really triggered.

Speaker 2: 4:26

As we looked at January. There's been a steady drumbeat of positive news and again, while many of us who have been focusing on the sector knew that this Schedule 3 review has been underway and the next step of that process was the DEA to come back with their opinion on the HHS recommendation. So we knew that that was happening. But for a lot of tourists, pedestrians, generalists, whatever you want to call them, people who aren't obsessed, focused and otherwise staring at the space, the headline on what was it? January 3rd, a punch bowl headline. Sandy DEA told House lawmakers cannabis schedule review is ongoing. About a week later, we got that release of 252 pages of documents, excuse me and then explained that cannabis as a currently accepted medical use for treatment in the United States and a potential for abuse that is less than other drugs and substances, and Schedule 1 and 2, a coating alcohol. And then what was it? Two weeks later, toward the end of January, we got a DOJ, you know, response to the lawsuit brought by the industry that effectively said the court shouldn't get involved, were, you know, already in the process of making this decision.

Speaker 2: 5:39

So you know, all of that sort of combined, you know, to attract a lot more capital in the space and I think the composition of that capital is important, as we've seen in the last couple of days. You know that's fast money, that crypto money that you know fast money fund, hedge funds it's really the only money in town that can get to these names because most of these institutions have got all of the institutions 96% of these floats are, you know, are non-institutional. It's really moved these things around and you know we I think the MSOS was up 48% toward the end of January and subsequently it's come in. I think right now, as we sit here, it's up 21%, which, again, if you walked in on February 14th and said MSOS was up 21% and you know you've worked off your over bought conditions and you had green thumb and tru-leave and Verona wall testing big breakout levels, you'd be pretty excited.

Speaker 2: 6:31

But that's not the way this space works. There's been a lot of conjecture around the timing of the news and you've seen a lot of fast money and just to bring this into our landing in the last four days, you've seen another ETF, which is MJUS, with a massive rebalancing and they're just, you know this is not the way these stocks trade. They're coming in with market orders for 100, 200,000 and just pushing these things around 10%, 15% in a clip. So that's a large reason why we've seen, you know, this excess volatility in the last few days, last you know five days. We'll call it Last time that they rebalanced. I think in total it lasted two weeks, but most of that damage was done in the first few days. So we'll see as we wait for the next headline from the government.

Speaker 1: 7:12

So the real point on the volatility is that because there's not this, that much institutional or if any kind of big money is going there, there's just lower liquidity, which causes these spreads to widen and causes some of the bigger swings. It's not really as much fundamentally driven in terms of the speed of it.

Speaker 2: 7:27

Well, I mean listen, you can't say the fundamentals are absent, but you can see that the structural dynamic is amplifying the moves both ways. I think you know you can argue that you know the prices of cannabis prices, you know a ratcheted lower over the course of the last few years and many of the states were delayed and there are fundamental reasons why the prices have come in. But, that being said, you know these companies are still paying a 75% effective tax rate. They have no institutional capital, they have no access to capital. That hasn't been, you know, a legitimate raise in a few years. And you know the companies that are still here are lean and mean and ready to, you know, kind of move back on offense.

Speaker 2: 8:05

But we need that kiss from the gods, and you know we think that you know comes by way of a trippy, trifecta, as we call it. That you know, we think it's Schedule 3. We think we get that. You know that DPA ruling, either a proposed ruling sooner versus sooner rather than later, or a final ruling, which you know may not be sooner rather than later, but we'll come in the next couple of, you know, several months. But either way, right this is, you know, 70-some odd years of prohibition being unwound, and you know whether we're talking about a matter of weeks or a matter of months.

Speaker 2: 8:33

Unless you're own, you know MSOS paper, it really shouldn't be your. You know the when shouldn't be as important as the what and the why. You know, as 280E falls away, which is the big takeaway for Schedule 3, whether that's for this year or next year, or it means to be seen you know OPE springs eternal and there are some lawsuits around the taxation regime that's currently in place. But you know 280E falling away I think I read you know will drop around $600 million to the bottom line, you know this calendar year, which is not a small amount of money for an industry that's been starved to capital for so long.

Speaker 1: 9:07

You get a sense, when that DEA ruling comes out, that that can be a sell the news type of dynamic. Or is that sort of the the go ahead to allocate even more to the space?

Speaker 2: 9:19

I think it's a step. The other two parts of that trifecta are a Garland memo, which we expect will elucidate the how, how a Schedule III substance is going to be treated. We think there's going to be some language in there. That's going to be the main takeaway for Nicole memo. Is going to be some language for banks and or financial institutions, like we don't know because we haven't seen it, but having the attorney general come out and basically rescind or unresinned. I guess the Cole memo if we're going to be proper, the Cole memo when Jeff Sessions pulled that in 2018 was that tug on the sweater string that really unraveled the whole thing, because once before that, all of these cannabis companies had no problem banking. Since then, banking has been problematic, not only for the publicly traded guys, but more so for all of the operators out there that without the scale, they definitely can't compete with this tax treatment, in which the cost of capital but that we think is going to come in as the second part. And then we still think that there's a shot for safe. We don't really talk about it because it's been a source of so much angst and frustration and the legislation is the US legislature is a shitshow, to put it mildly so having any confidence. Especially watching what's going on with the funding bills right now and with all the aid bills, it's hard to have any confidence in these people. But we've been told that work continues and that's still part of the intended pathway into the election. So we have an election in nine months and we expect a lot to happen between now and then.

Speaker 2: 11:06

If you're trying to day trade these things and dancing with MJUS, which is out there with 100,000 share market orders we don't know when that cleans we're luck with that. But if you want to take a step back and zoom out a little bit, I think it's a pretty exciting time to be in the space. I think the math without 280E is compelling. And then you have all the animal spirits and what happens as we come through the other side of this cycle, the unknowns, as you probably could elucidate better than I. The market is dancing on the head of a pin. I don't know if the fever broke yesterday. I think they're going to have to get to NVIDIA before we get to a place where we could say normalcy is returned. But that's a variable that you can't ignore because this is all part of that dynamic, whether it acts like it on updates or not.

Speaker 1: 11:53

I mean honestly, if there are ways to integrate AI with cannabis, I'm sure the entire space would go vertical and moving, at least for now. But let's do some theory analysis on the election. So Biden or Trump or whoever else, who they'll know at this point, but does whoever's in the White House next either remaining or change? Does that change the path, the trajectory of anything?

Speaker 2: 12:16

You know, I really this election cycle is really bumming me out because you have two really bad choices in my opinion, unless you're two evils again. But you got to play the hand, you've been dealt. I had no faith in Biden following through in his promises. Kamala Harris released a video last Friday where she came out and said the quiet part out loud that the federal government has changed the federal cannabis laws. She literally released that video last Friday night.

Speaker 2: 12:48

Now that means one of three things A she's gaslighting everybody and everything they say is true. B it was scheduled but it was pushed. Maybe it was because of the leak last week, who knows? But that or C it's just the timing. It's just on brand for a lot of chaos and the timing was a cross wire. But the last two scenarios, they were very positive. It means that it's coming and when that comes, I don't think it's going to really matter who's going to. If it is in front of the elections we expect, I don't think that part is going to matter as much as in terms of who's in the overlaps next year.

Speaker 1: 13:29

Okay. So it's sort of more of a let's call it a competence issue More than anything else.

Speaker 2: 14:09

I mean, how can you know if you have type, you don't. If you're not, if you're not having concerns about or about the government, then I don't think you've been paying attention. But this is a process, the scheduling process, which I guess the upside of anger is that this is not reliant on Chuck Schumer or Mike Johnson. This is really a process. We think it's already. You know it is done and dusted like famously last words. But you know you have 250 pages approved. You have, you know, an AG that was appointed by Biden. Is he really going to, you know, do something? You know, really, like that, I don't know. I mean, I guess it could happen, but we think we're going to get, you know, at least schedule two and a Garland memo. And oh, by the way, again, like now, let's not get away from the actual.

Speaker 2: 14:52

You know as much as everybody is treating this sector like it's a phase three binary. You know outcome and that's how it's treating right. Like this is a binary. Like you know we if see if MSOS was $15 last December, I guess two December's ago on the specter is safe and schedule three is magnitude is more important than safe. You know where should MSOS be? On schedule three, it's at eight and a half dollars now. Right, it was, you know, almost two X and it was 15, you know, on maybe safe. So like, yeah, it's a binary outcome. It's a phase three readout and I think once we get that, you know, it'll take a lot of pressure off of the space and allow people to focus on the underlying fundamentals. So we're going to need to have MSOS play a critical role this year as a bridge to that sticky liquidity because, again, the fast money composition of volume right now is not the type of sticky liquidity that's going to ultimately comprise these cap tables. Right, you know, green thumb, verano, terrison, you know like they're going to attract institutional money. Right, chiroleaf, I guess there's a bunch of them, right, and I think that fundamental analysis is really going to start when the ability to custody these stocks is here.

Speaker 2: 16:07

We continue to talk to a lot of people and we talk to a lot of people who talk to a lot of people who are outside of our circles, who tell us that, you know, after so many false starts and empty promises, they want to see actual change before they enter the space. Right, so like, when does that? What is that signal? Is it the schedule three proposed rule. Is it when it's finally implemented? Is it the garling memo? I don't know, but we do have a good read that you know, based on every conversation, most every conversation we've had. You know it's been produced to the courts and will release slug right. Show us this actual change and we're going to, and we're going to put chapter onto the space.

Speaker 1: 16:45

Let's get into the industry itself in terms of potential for consolidation, competition if it ends up being winner, or take all right from a very long-term perspective, do you think you're going to see acquisitions really accelerated as things lighten up on the federal side? Or, yeah, is it one of the things where the best thing to do is just go for the biggest, the big, or try to look for, you know, more undervalued but smaller opportunities?

Speaker 2: 17:10

Yeah, I don't think bigger is better. I think, much like Canada, you're going to see a fang type of you know, or a fearsome foursome that's going to attract the institutional capital and even, like you know, the biggest and the big right now are too small for a lot of the institutions, right, like you know, these guys to move their needle on a performance basis, they need to own a lot more than they could own of where these companies totally want. I mean the whole industry right now, as I sit here, including ETFs, is $12.8 billion. That's the entire industry market cap of plant touching, including ETFs. That's everything Wall-end $12.8 billion. Right, it's not a big number, right? So, like you know, I think now is a really good opportunity and we've seen it sort of play out in the first phase of these rallies and you know the two-sided torque on some of the back-end names or some of the names that were kind of left for dead in the status quo, and we use air wellness as one of those names because you know we was trading at 60 cents, you know, in the summer, and it was priced, you know stones through it from its cash level because you know they had a lot of debt. They, you know, didn't have we as an industry didn't have visibility on the cash flow generation levers that are going to enable that company to service the debt, or any company to service the debt, right. So, you know, like things like safe banking or Schedule 3 or Garland Memo, or Florida or Ohio, which also came on, or Pennsylvania, right. So as those things start to come into view, these things are getting reprised from sort of distress to, you know, potential equities, again, right, I see potential because it's still trading at a pretty significant discount to other CPG categories, especially given, you know, sort of their forward profile in the states that are onboarding. But you know, at the end of the day, you know it's going to take, you know time, it's going to take the process.

Speaker 2: 19:04

Msos has to be that bridge and I think as we get to the other side and companies can custody and own the stocks, they're going to do the work and they're going to say, okay, you know I could have this 300-pound gorilla or I could have this 200-pound, you know, ripped. You know, you know operator that is, you know, going to have a lot more leverage on the sneaks they're in because maybe they're deeper or have a lot more optionality to move to other states because they don't have a full footprint and all of those nuances that we used to think would matter, before we realized that this was all sort of structural, you know, trade here where you have, you know, 90% to 90% of the volume on most days was algorithmic. It was all sort of the ARDS picking off retail and, you know, playing the disparity between NYSE listed ETF and a, you know, and the underlines that are traded on third-tier exchanges or fourth-tier exchanges. So there's been a lot of fuckery is sort of what I'm saying. And I think people, you know, they look at the space and they say it's down and they say, oh, it's falling again, oh, I fell for it again.

Speaker 2: 20:09

Here we go again. Okay, like I get it. But let's not forget, you know, there are things that are underway right now and there's enough people who have, I think, pretty significant ties to the space who are telling us that this is moving, that you got to, you know, sort of get to the mindset that, okay, it's going to happen. How do I want to be positioned? Do I, you know, what's my, what's my portfolio look like? You know, do I have enough beta versus some of the guys that I want to hold on to through the long run. And you know that's how we're trying to position and that's how I think Dan was trying to position. And so you have a barbell where you have the saying you know, so active, a better word on one side and you have the forgotten on the other. And if we do get the regular, the regulatory reform, I think you're going to see a faster pace of reflation on that on the back end than you will on the front end, but a higher margin of safety on the front.

Speaker 1: 21:02

We speak to think. It kind of goes back to what I keep stressing around factors and small caps and sentiment in general. The forgotten, as you mentioned, are probably going to be the smaller dots within the space. So, yes, a rising tide should cause all these dots to co-move together. But if you were to have a broader reallocation of the small caps, I would think the end quotes the forgotten would benefit just because they're smaller anyway.

Speaker 2: 21:26

Well, I mean, the opposite of volatility is liquidity. Right, try buying at them, stock right and you'll see just how that dynamic works. But here's the other thing like the back of the totem pole guys that we talked about, they're probably going to be first to go to market. And, as we talked to a lot of these guys because, again, michael, we work with some of these companies we advise them and we tell them that when the time comes to raise capital, obviously we want to find a strategic first where it's not so much about dilution as much about the forward optionality that partner would bring. If you can find a strategic, then let's go and do a private placement so you're not going out there and giving all of the shorts. And the short interest continues to trend higher here for a few reasons, not just from a negativity standpoint. But you don't want to do a bought deal and let all these guys give them the out if at all possible. Right, you want to try to leave that future demand in the marketplace, but we're not in a place yet where we have options. Right, capital is still tight.

Speaker 2: 22:29

It's not like there has been a rush into this space. As I said, there's been so many battle scores, war wounds and PTSD, that I don't blame a lot of people for not buying into this and certainly we expect that whenever. That is when we do see some federal reform. I think that's where we really start to see this mature from this side pocket, speculative corner of a corner of a market into a sector that starts to emerge. And then, as we research this plant more and understand the wellness properties and the efficacious agility quote unquote then I think that a lot of the late cycle adopters will move in. But this is taking a long time, right, I mean, we were programmed as kids to believe this is your brain on drugs with a frying pan and the egg and all this, and that also has to cycle out all of that rhetoric and all of that perception. So I think we're on our way, but it's a long tail.

Speaker 1: 23:30

Question in the thread from somebody asking about your global outlook, talking about the UK, talking about Canada. Any perspectives or thoughts on things that are happening outside the US?

Speaker 2: 23:41

I mean Germany is interesting. We're on. We think April is when they're going to open the doors. That is, implications for the UN, single narcotics dimension, single treaty narcotics dimension, which I think a lot of people or some people think will be a stumbling block for the DEA. But we think the global outlook is there. I mean you're seeing the programs evolve and you're seeing it in the Netherlands, you're seeing it in Israel, you're seeing it in Germany, you're seeing it in Poland, you're seeing it in Australia, you're even seeing it in the UK at some level. So different strokes for different folks. It's going to take time but if Germany does flip, I think the implications for the EU are going to be pretty massive. And that's another conversation. In terms of which companies those are, there's a few I've done. Farms happens to have a nice set of licenses and there's others. But that's not. The US MSO is, with the exception of the rural lease which has some exposure there.

Speaker 1: 24:35

I got a few minutes left, so Todd has to hop to release Everybody. Please make sure you follow Todd Harris in here on X. Maybe if I'll ask you a minute. I'm curious, just given that you're really deep and immersed on the research side of things, how do you even go about identifying through the potential of any particular cannabis stock play meaning? Is it based purely on location? Is free cash, well, the most important dynamic. What are some of the things that you tend to focus the most on?

Speaker 2: 24:58

Well, I mean, listen, it comes down to performance and execution of performance over a period of time and there have been some companies that I think have stood out in that regard. But through us and this is, everybody has their own style we try to put a fair amount of emphasis on the jockey over the horse, the integrity of management there's a lot of Now. There's a lot of people who cut corners in this space and I think you know if there's anything that came out positive from the last, you know, five years, and again you had two, what was it? 85% drawdowns, 84% or 184, 192. So you had two drawdowns in the last five years and if that's good for anything, it's good for demonstrating you know who does what when the going gets tough, who cuts corners when they need to, and you know, and really iron sharpens iron, like you find out what people are made of. I mean, that's where, you know, really, jason Wilde and I forged our you know our bond and that first downturn, and you know, and many others along the way, and I think you know if you can find, you know there's a lot of good people in this space right, and the integrity of that management. I think in this space more than others, carries a lot of weight and ultimately, you know, as you know, it's comes down to fundamental performance.

Speaker 2: 26:17

I think the industry got a bad rap, if I can just say this. You know they've alienated every class of investors over the last five years. You know, first, who is the growth guys, but after you know we're given two, 80, and after all the delays at the federal level, you know all these companies, you know, you know, rottled back on their cat backs and you know and decided that they wanted to stay alive to make sure that they're around to thrive when the time comes. So the growth is going to go away when you're not spending on growth, obviously, and I think a lot of growth investors, when they started to see those numbers, said thank you very much, I'm out. And then, and then the value guys can long said, wow, these things are really cheap. And they got involved. And you know, as they saw the dynamics and saw that there wasn't the visibility of cash flow to service the debt, and they're like, holy shit, this is a value trap, I got to get out. So over the last five years you've alienated growth, you've alienated value, you've alienated retail, and you know that you have to rebuild that trust.

Speaker 2: 27:10

So I think that's going to take time and price. You know the buyers are probably higher, as they usually are, but you know, know what you own, know you know why you own it and you know like I think if you've been in this space for a while, you've come to expect a lot of these crosscurrents and volatility. If you're new to this space, even if you're coming from the crypto world, you're probably asking yourself what the fuck did I just get myself into? But again, as custody comes on board, as liquidity comes into the space, the opposite of liquidity is volatility. So the more liquidity we have, the less volatility. Stocks will come over time, hopefully at higher prices.

Speaker 1: 27:44

Everybody again, please make sure you follow Todd Harrison. This will be available on LeadLag Live. It's a podcast. Hopefully I'll have Todd on for a longer conversation in the months ahead. And everybody, I'll see you some other day. Thank you, todd, appreciate it, appreciate you, thank you, thank you.