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Interview: The Future of Cannabis Investing

By Emily Flippen – Feb 29, 2020 at 3:30PM

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Lofty valuations have sunk back to Earth for so many pot stocks, is now a good time to buy in?

In this week's Industry Focus: Wild Card Wednesday, Emily Flippen talks with Matt Anderson from Vanguard Scientific. This show was prerecorded in December at MJBizCon, the world's biggest conference for the cannabis industry. Matt talks about his history in the regulated-products market, why marijuana is a lot like the oil we put in our cars, what investors need to know about buying into the market now that it's dropped so harshly from its highs, how the marijuana industry might handle vertical integration, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Dec. 11, 2019.

Emily Flippen: It's Wednesday, Jan. 29, and I'm your host, Emily Flippen. For this week's Wildcard Wednesday, we're going back in time a little bit, back to Dec. 11, 2019, when we traveled out to Las Vegas for cannabis convention MJBizCon. While our team was out there covering the cannabis industry, we had the opportunity to sit down and chat with one industry insider himself, Matt Anderson. 

Now, before we dive into our interview, I want to give listeners a quick overview of the cannabis industry to the extent that I can. We hear a lot about investing in pot stocks, especially in the news, and the volatility that comes with it. But it's important to understand the industry dynamics for the cannabis industry. They're completely different than any other industry you may be investing in. For those who aren't aware, marijuana, both medical and recreational, is legal in Canada, as well as 11 states across the U.S. Hemp was legalized across the U.S. in 2018, and it's not the same thing as marijuana. Hemp is derived from the same cannabis plant that marijuana is, but it doesn't contain any of the psychoactive substances -- that's THC. CBD is a chemical that can be derived from hemp, and the sale of hemp-derived CBD topicals is legal nationwide. 

So, having covered our bases there, the opening of the cannabis industry has opened up a whole new part of the equity markets. A lot of investors have lost their shirts investing in the cannabis space, while others still see the long-term potential. We sat down with Matt and we talked about his business, the state of the cannabis industry today, and what he sees for cannabis investors in the future. We hope you enjoy the interview!

Matt, thanks for sitting down with us today and talking. We're here at MJBizCon, which is the largest cannabis conference for professionals in the world. Yet there are still a lot of investors and a lot of listeners out there who have no idea about what investing in cannabis even means. You have been around the block yourself, to say the least, in the cannabis space, so I'd love to hear a little bit more about your background, your history, and how you got started in cannabis.

Matt Anderson: So it's dangerous, right, to say you've been around the block in the cannabis industry. My background's actually in regulated products. When I was 21, I built a distillery in my garage and made bathtub gin. Fast-forward seven years, we had two distilleries built in the United States and we were distributed in 17 states. Coming out of the alcohol space in 2015, I joined the regulated environment in Florida, actually for Senate Bill 1030, which was high CBD, it was called the Charlotte's Web Initiative. And I really got to see the difference between luxury or alcohol products to a real health-controlled product like a cannabinoid. And from that, the industry has just blown up, right? It's been something that's had conversations touching medicine, therapeutics, all the way to recreational and consumer dollars. So, for investors looking in the space, they've been able to find a niche, but then trying to quantify what that niche opportunity means has been, let's just say, less than straightforward.

Flippen: Your role now, you are now the CEO of Vanguard Scientific, which is an extraction company. I know a lot of listeners out there were probably confused by a lot of the words -- not only extraction, but cannabinoid, even. So maybe give us a baseline. What do you do now? 

Anderson: Yeah, sure. We're actually technology integrators, but, extraction company, sure. Let's use oil and gas for comparison. The oil that you pull out of the ground isn't the same E-85 that you put in your gas tank. There's about nine to 10 different pieces of equipment, and then a number of specialized different steps that take, to actually be able to consistently produce that final oil product. The same is exactly true for this industry. Whether you're looking to produce a full-spectrum oil for a therapeutics product, or you want to get a distillate or isolated cannabinoid product for pharmaceutical off-take, there's different equipment, different processes, and different regulatory hurdles that are needed in order to be followed and compliant do so. What we do is, we work with our clients in a sole source relationship. So we'll show up and become consultant advisors. We'll help them procure their equipment to meet their needs. Our company's technology agnostic, so we represent the best extraction companies on the floor today. And then, we help them understand knowledge, technology, and methodology so they can actually produce compliant ingredients to get to the final market. 

Flippen: I love that analogy you used about the gas you're pulling out of the ground not necessarily being the same thing that you put in your car. Obviously, your company now is great kind of a middleman in that process. I'll continue the analogy. You have upstream, midstream, and downstream in the energy sector. In the cannabis sector, it can be the same, right? You have people who are growing their product, people like yourself who are working in the middle, transforming what you pull out of the ground into something like oil. And then, you have people who are maybe taking that and then putting labels on it and selling it to the end consumer there. So it's a really great analogy, and there's lots of interesting, investable companies at every point along the space. But the equity markets now, they've been really depressed. Maybe talk to us about what we're seeing today that's impacting the equity markets, both in Canada and the U.S. 

Anderson: Look, I think that what's happened in this over 60% retrenchment of the Canadian markets was probably the best thing or the most healthy thing that could have happened to the industry. For better or for worse, we've had very comfortable legal firms and very comfortable NYMEX or CSEX marketplaces that were enabling pre-revenue companies to justify large valuations.

For sophisticated investors, they kind of saw it coming. Quarterly reports were coming, and without real revenues or real assets, you were selling on an opportunity of a value creation. So we saw that happening in the United States. But at the same time, some of the more sophisticated private equity groups in the United States began to aggregate dollars and then bet on real revenue, and bet on, let's say, horses that could run. Vanguard, for instance, we're eight quarters of on-target earnings, and we've really focused on returning that investor experience.

This is going to be the largest economy in the United States and the world. Dow Chemical have released a small press release that said by 2025 that hemp might actually be larger than soy production globally. So when you start thinking about what the actual cannabinoids can do, and then the actual plant itself below the flower, we're starting to talk about addressing plastics and biofuels, right? Pain management. I think the number we quoted was something like a $2.6 trillion investable or addressable market that's capable.

So the equity markets themselves, what they've done is, they've said, "Look, you can't bet the widget and expect the horse to come in. You have to do your diligence. You've got to look at a run rate. You've got to look at the fitness of a company. And just like any other industry, you have to use some standards before you place capital."

Flippen: Now that the valuations we've seen in the public market have come back down to a reasonable basis, it really gives investors something to start working off here. What do you see as being the biggest headwinds and the biggest tailwinds for cannabis companies today? 

Anderson: Wow, that's a great question. I think that companies that have published forward-looking perspectives that haven't recalibrated or haven't had a chance to readdress what they've promised are in a tough position. I've seen some of the best companies, no matter how big they are, print reactionary statements saying, "Look, given the circumstances in the environment, here's now our recast." Those are things that I really look for and appreciate in leadership teams.

Yeah, they take a haircut in upfront valuation, but they're finally putting a barrier, or I should say a hurdle rate out there, that they'll actually be able to hit, versus getting ready to let their investors down again. So I think that's probably a very large headwind opportunity. Folks that have gone heavy on the wrong infrastructure, that have invested in the wrong part of the supply chain, one would argue it's time to recap those companies' bets and start over. 

Flippen: In terms of tailwinds, for Vanguard Scientific, what do you think is catalyzing the industry moving forward? Is there any reason why retail investors should be involved in the cannabis industry today? 

Anderson: Yeah, without a shadow of a doubt. I think that the regulatory hurdles overall create the market opportunity. In any sort of industry that has hurdles or barriers to entry, what you see is market opportunity for those companies or performers that have the fitness level to compete. So, not everybody has a chance to be on the Walgreens shelf, but boy, oh boy, once that product hits the shelf, they're in 100 stores worldwide.

So, kind of looking at that analogy, for those operating teams and those companies that have a strong value proposition -- and I'd say Vanguard definitely is one of those companies -- what we're doing is promising our investors stabilized returns. We're looking to smooth out the return narrative while we're aggressively asking them to invest in audacious reaches for us to continue to expand our business model. 

Flippen: Now, as somebody who is operating in that midsection of the market, I'd be remiss if I didn't ask you about vertical integration. It's a fancy word to just say that there are a lot of companies out there that are making the decision, whether that be because of their own personal beliefs about the market or regulatory requirements, to own every aspect of the value proposition in the cannabis sector. So they're owning the seed to sale experience, producing it, extracting it, changing it, labeling products, doing it all themselves, getting to consumers. Obviously, that is not your business right now. How do you feel about the future of vertical integration? 

Anderson: Great question. You go back to business school; you've got two paradigms. One's buy versus build. Can you be great at everything? Are you an expert at every step of that value chain? And then you start setting things, supply chain integration, right? And that doesn't say vertical supply chain. I'm not saying I own it all. But what it does mean is, I do have a tight relationship, right? I'm hardwired and understanding, in which I know tolerances, plus and minus a value across the supply chain, so I can do what is the most important part, and that's promise consistency in the final product.

So I think some of the companies that are doing it the best aren't necessarily coming in and saying, "I have to own the company because I want to justify on my balance sheet that I've got the value creation," but they've come in and invested in this supply chain infrastructure because they have the need to guarantee that final product. So I think it's supply chain integration versus vertical integration for the win. 

Flippen: Matt, thank you so much for talking with us here at MJBizCon. It's been an absolute pleasure. 

Anderson: Yeah, thank you and thank The Motley Fool!

Flippen: As always, people on the program may have interest in companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass today. I'm Emily Flippen. Thanks for listening, and Fool on!

Emily Flippen owns shares of Charlotte's Web. The Motley Fool recommends Charlotte's Web. The Motley Fool has a disclosure policy.

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