In a wide ranging conversation with INN Greg Taylor portfolio manager of the Purpose Marijuana Opportunities Fund talks about the current state of the cannabis market.
A Cannabis fund manager expects to see changes in management teams for marijuana firms.
Following the year-over-year results from the investment fund he manages, the Investing News Network (INN) caught up with Greg Taylor, chief investment officer of Purpose Investments and portfolio manager of the Purpose Marijuana Opportunities Fund (NEO:MJJ).
Taylor offered a perspective on the current state of the cannabis investment market, and ventured a few guesses as to the development this volatile sector will see throughout the year.
Strategy in the cannabis investment market
In February it was revealed the Purpose Marijuana Opportunities Fund was able to secure a return of 53.43 percent on a one-year period since its inception on January 31, 2018.
When asked about his investment strategy in such a volatile market that offers plenty of pitfalls without much notice, Taylor said he has been diligent in not buying everything and assuming everything will win in the end.
According to the fund manager, the sector’s volatility will continue to rise due to consolidation tactics, pressure points from promises by LPs and potential company failures in the space.
“It’s going to be important to run nimble, make sure that you’re not just blindly buying stocks in the sector and not watching them, because there are going to be sudden moves which might catch people off guard,” Taylor told INN.
The race to avoid failure from LPs and other cannabis companies
As the cannabis market evolves from growth stages to an early established industry, Taylor indicated he is expecting changes in the management teams from firms.
He explained at the start of the boom for the marijuana public space, CEOs needed to be market people capable of raising money, selling a business plan and securing public listings.
But now he is looking to see management teams acting in an operating model with the ability to effectively bring products to the market, continue to bring down the costs of growing, successfully build brands and maintain the confidence of shareholders.
While some players in the space will adjust and appoint new leaders, Taylor said, others will “be stuck in their ways” and become a risk.
Taylor highlighted the market is expecting to see more failures in the cannabis space. In his personal estimation, there are still “too many companies.”
In the race between large cap Canadian cannabis firms, Taylor explained some of the companies lagging behind still have time to catch up to the clear current leaders.
This can be done thanks to partnerships with industries such as alcohol, tobacco, pharmaceuticals or a consumer packaged goods (CPG) company.
US market potential could create disruption in the Canadian cannabis roadmap
Due to the rules implanted by Canadian exchange regulators, in order to list publicly in the biggest Canadian exchanges, no cannabis company can operate assets in direct contact with the cannabis plant in the US due to its illegal status federally.
This decision, accompanied by the sweeping state legalization of marijuana in the US, has led to the rise of multi-state operators (MSOs).
These MSOs operate cannabis assets across the US legal markets such as growing facilities, networks of dispensaries and lines of branded product for medical and recreational uses.
When these MSOs look for a public listing, the majority turn to the Canadian Securities Exchange (CSE) as it has elected to not block US marijuana plays.
In February, BNN Bloomberg reported unnamed sources indicated Canadian cannabis executives were heavily lobbying for the TMX Group to relax its rules in regards to the US.
The TMX Group has remained in its stance against allowing any changes until a time where cannabis becomes fully legal in the US.
As part of a panel discussion in January, Brady Fletcher, managing director and head of the TSX Venture Exchange (TSXV), said the regime of the exchanges doesn’t allow for listing requirements due to sentiment.
Taylor himself doesn’t foresee any changes in the listing rules preventing Canadian cannabis leaders from exploring US opportunities anytime soon.
When you’re looking at someone like a Canopy (NYSE:CGC,TSX:WEED), which is arguably one of the global leaders, they should be in the US. I think that it should be debated why they are not in the US at this point in time and if the excuse is really because of their listing I think that’s going to be a really interesting debate for the year.
Taylor said the potential for a company this year to elect and downgrade its listing in Canada to the CSE or the Aequitas NEO Exchange to pursue US operations, while low, could happen.
“I think that’s a bit of a wild prediction for the year, I think that’s one that could be on the table [to] have one of these companies say ‘I need to get into the US and the TSX making it so I can’t go to the US has become an impairment to my business that I am going to have to risk.’”
According to Taylor, this debate rises as the tension of participating in the US cannabis market increases for Canadian companies with a supposed first-mover advantage in the industry.
“A lot of people going back a year, really thought that the Canadian companies would have two or three years to get up and running in the Canadian market.
“And then would be able to turn into the US and I think the surprising thing to a lot of people is how fast these American companies have come on and the MSOs have gone from being small companies or afterthoughts to actually being really big established companies,” he said.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.