Investing In The Cannabis Market

Pasternak joins us. He's the executive vice president of BINSK and he can talk to us about um, the market and the future. It's it's interesting out because I was just in New York City for a few weeks and I started to see these cannabis stores popping up. They weren't selling real weed yet. It was like Delta eight th HC, which I guess is kind of a knockoff, slightly legal version of legit th HC. But it'll come. And I wonder how you expect this market to develop?

Is it going to be like the liquor market developed? Hey, how you doing? Thanks for first and foremost thanks for having me today. UM, I would say that the liquor market is going to be uh, you know, a little bit of provides a little bit of insight for us in terms of as legalization continues to roll out and how they do it. You'll see differences in terms of the distribution models in particular in some states that that are, you know, share some of the characteristics that you see

on the liquor side. But altogether, no, I think cannabis is going to prove to continue to be its own, um, its own product category that takes a few few things in particular from the liquor segment, but no, on its own, I think it's going to be completely different. To be ho. Of course, the liquor market has been legal for so long, um, I guess the cannabis. Cannabis was legal for a long time before anyone figured out what it really was. But

it's been uh, fairly well demonized in the US. How you go about now in this kind of quasi legal state sourcing and selling weed? Is it? Are you looking over your shoulder all the time depending on which state you're in? Great question? No, Actually, we were able to sleep pretty well at night over here. Everything we do is fully legal. We only operate in legal territories. So even though it's federally still illegal. Um. As you all know,

it was deemed an essential business during the pandemics. So the the idea of having concerns at this point, UM, are are long gone. And it's proven by the fact that you see more and more investors entering the space on a daily basis. So the risk factor is almost fully mitigated at this point. And no, we are only operating in legal territories. On the liquor comparison, as you compare it to there, there are some things to look at.

For example, I could go into a liquor store today and buy fifty handles of vodka and in six kegs and no one says a word to me. But in most legal territories, I can only buy a edibles or announcer to a flower. So there's major compliance and regulatory issues that we're still battling through here. Alex, you mentioned the federal legislation, your federal approval. Give us a sense of where you think that is and how that may fall. Yeah,

great question. Um. Look, I'm a big numbers guy, engineering background geek out on data and science in particular, there's nineteen recreational states in thirty six medical nineteen and thirty six. It doesn't take an engineer to understand that there's really no turning back at this point. Full legalization is imminent at the federal level. Look at the latest proposals by the Schumer Bill and progress on the Stafe Act and

in Congress. I mean, there's just too much money on the table for the private and public sectors, particularly the government. Putting aside the money, there's two other major factors that I want to address. Number one, the opioid crisis and number two the criminal justice system. Last year alone, we lost about a hundreds thousand people to an overdo us on opioids or another synthetic drug. The legalization of cannabis

can immediately help this horrible, horrible opioid epidemic. Lastly, the war on drugs needs to end with sensible criminal justice reform. We need to address the fact the imprisonment of more than forty thousand Americans incarcerated still for activities that are now legal in a significant portion of the country. Well, I wonder what kind of people do you have to

deal with then? I mean, when I was a kid, we drive down to Athens County in Ohio, or at the Humble County in California, and there was a pretty shady group of grow ops. Um in those places, you did not want to tread on someone else's farm. Has that changed significantly? You know, there is a ton of black market still going on today. They're estimating in California alone that the black market is somewhere between two to

five the legal market. That range of two to five is just so mad, considering the legal market in California is tracking to be four billion. So you really just have endless black market cultivators and endless black market producers at this point. Um, what's going on back there of theft and stealing from farms and security is uh, it's definitely a slippery slope. And again we're pretty grateful that we are nowhere near what's going on in some of

those parts of the country. In particular, what about the quality and the strength alex of the of the weed that you guys are getting today, I mean, it has steadily increased to a point where, um, you've got to be careful if you want to smoke a joint, especially if you're an older person. Is that going to be

easier to measure and easier to decipher? Yeah, So think about like alcohol again to compare as you get as we grow older, you go into some of these superstores, these mega stores, in the product variety just ranges from from lower and lower quality and two dollar bottles of wines that select stores to thousands and thousands of bottles of wines in some stores. So I think the same

thing is gonna happen with cannabis. Over time, We're gonna see, uh, we're gonna see products going again a little bit towards the race to the bottom on on the value products, and then we're gonna have continuously higher and higher end products what you see on the what the first part of your question what's happening right now is one of the only data points associated to cannabis is the THC percentage that's the consumer sees when you go by cannabis

or flower as we call it in the industry. There's a numerical value associated to that test that strain from that batch. They usually range between let's say fifteen and thirty. But if you watch what happens in a given dispensary on a given day, these these uh, these people come in these a construction worker after work or um a an electrician after work and they have a twenty dollar bill in their hand, and they say, how far can

I take this twenty dollar bill? What is the highest high I can get from this twenty in in comparison again to alcohol, what's happening is ever Clear is being valued at a higher quality product. And let's say a blue label. Just because ever Clear has a higher alcohol content, it doesn't mean it's a better product than blue label.

And unfortunately in the cannabis market, it's just not as educated and it's not as sophisticated yet, and so the blue label is literally selling for less money than the ever Clear. And that's part of what I'm trying to do every day is help educate and help everyone understands all. Alex Pastron act there from Bens, Thanks very much. This

is Bloomberg Now. We got earnings out today UM from a number of retailers, and we're going to continue to get them out over the next couple of sessions from more Walmart UM coming out this morning, and UM giving a beat in term of its UM in terms of its previous earnings and and raising its UM outlook in terms of its forward earnings. And then we at home Depot,

which disappointed. How to bring Katie Thomas, she is leading the Kearney Consumer Institute out of Pittsburgh to talk about retail because it's going to be such a huge theme this week. Katie, First off, what's your reaction to what we saw already? You know, honestly, I would say I'm not that surprise that Walmart and some of the big box retailers that really stand to benefit from some of the trends we've been seeing with consumers, so they're set up to benefit in all the right ways. And to two,

we were seeing them return to stores. The store is king as much as we hear about convenience. When we talked to consumers where do you prefer to shop, especially for groceries, they still still tell us they love this store. And on top of that, in general getting as much done in one trip as possible, it's still you know, relatively attractive to consumers. They're not doing as many of those quick runs to local grocery store is but instead really focusing on the big box how much can I

get in one trip? Um the it's competitive pricing, giving some of the inflationary concerns and so a lot of positive tail wins for Walmart that I'm not surprised you saw flow through in those comp uh store sales. So, uh, Katie, the omni channel strategy where I can maybe order online pick up at the store, that seems to maybe have been a pretty good strategy for retail. Is that something

that can boost this industry going forward. Absolutely, So when we talk to consumers, they really love that as an additional option because it's really that perfect hybrid approach. So you're still physically going to the store you forgot something you can run in, but especially at the store the size of a big box retailer, whether it's Walmart and Target or Best Buy, you don't have to wander through

the whole store either. So it's really like those those different options, the optionality that we didn't have before that consumer really are excited to take advantage of, and I think you'll continue to see it not just in those types of swords, but as we're seeing it with small retailers and just across the industry in general. What happened at um Home Depot there their sales forecast is kind of hinting at a slow down in the boom that

we had seen is that just to be expected. I think, yeah, I mean a lot of people we've made the investments we were going to make in our house. Um, and you know, Walmart really stands to benefit from that everyday consumption, whereas the delta variant is driving just enough concern in the eyes of consumers. Now where what we really thought over the pandemic is people held off on buying things until they really felt like they wanted it or needed it.

And so with some of those home improvement I think it's you know, pressing pause for right now. You're not going to see the impact of the child tax credit flow through to home improvement as much either. So it's just kind of a combination of factors that I think is having home depots often a little bit Katie, one of the themes of retail in America over the last decade or so is there's just too many stores were overstored here. Um, where are we in terms of that metric?

You think we still need to reduce the footprint of the stores across the U S Well, it's an interesting question. I think you're seeing a lot of you know, uh press around that, a lot of shift to online businesses, all of that but the challenge there is direct to consumer businesses that are online only really have a challenge

with eyeballs and footprints. So you know, in fact, you're seeing some of these big box retailers make those strategic partnerships target with Alta Coals, with the Flora and with the DNC smaller brand. So it's hard to say consumers really like to get out there and shop. Um. I think it's really what we called at the beginning of the Pennant pandemic, what you saw was the death of the middle So it's really some of those middle of

the road retailers that lost their value to consumers. Then, you know, consumers do have so many options nowadays, you're just not ultimately going to be successful unless you have a real value offering in differentiation. Does the Delta virus Does at Delta Delta variant of the virus offer any severe headwinds? I don't think so no. If anything, I'm I'm more concerned about some of the ships we're going to see in the labor market to flow through of

the supply chain. Right now, you're seeing a little bit of an uptick in avoidance of stores, But ultimately, consumers have money to spend, and they do want to spend it, it's just gonna be a little bit of bumpy um in terms of spending when they know they'll need it. I think to slow down in the return to work is slowing that down a little bit again. Even apparel, non back to school apparel, apparel for adults is slowing

down a little bit in the retail numbers today. And that's just I'm going to hold off and see how things play out. Katie, real quickly thirty seconds, talk to us about the supply chain. Is stuff gonna be on the shelves back to schooling holidays. There are a certain categories where there are some challenge and it's definitely on consumer's radar. We're hearing from them directly, I should buy student then later. But at the same time, it's it's coming through in pocket. So it's really hard to say

exactly what that's gonna look like. And I think some of these bigger retailers are actually the most protected because they have so much strength in the market. So if anything, unfortunately, it's going to be some of the smaller retailers that I think are going to feel more of the impact. Katie, thank you, so much. We really appreciate it getting your thoughts here is we're in the midst of these retail or earnings Katie Thomas, she's a lead at the Currently

Consumer Institute based in Pittsburgh, PA. And again, you know, I think what a lot of investors are are focusing on this quarter as the retailer's report is kind of how is the consumer doing? Is the delta variant causing, as Matt suggests, perhaps some headwinds for some consumers and consumers spending, and so that goes to not only the results that they report, but maybe more importantly to the guidance they provide. So some good numbers out of Walmart

certainly a good indicator of the consumer. There gotta sell off in this market. As Greg was just reporting, what really jumps out of me is the Russell Uh. It is off one point five percent. So the small caps are really underperforming. UH. And it's a good time to speak to our next guest, Brian Small, principal portfolio manager at hood River Capital Management. UH. They are located in Florida like everybody else these days and money management business. Brian,

thanks so much for joining us here. Give us your thoughts based upon your experience of kind of where you envisioned small cap stocks here again under performing today, but in the reopening, a lot of people like the small cappers. Yeah, we're constructive from here the markets. The biggest concern I think is the impact on the delta variant on the economy, consumer behavior, business behavior. And we're constructive as we look out too small caps that significantly lab lag this year

there about flat versus the FMP up. So it's been a lot of multiple compression in these names. And I think as as we kind of go through the peaking phase here of the delta varian, people get their booster shots, case decline and people come to grips that earnings need to go up next sharing earnings estimates than we think small caps will tend to outperform. But we're constructive on the market in general. So small camps is a big universe. Is there are there specific places that you like best?

So at Hood River were bombs of stock pickers. So we like to see inefficiencies and stocks that that we're buying. We aren't really making industry top down calls bottom bombs. That basis right now where overweight consumers, loutical financial and industrial stocks in general, those valuations are better. They're tied to more of reopening in the economy, and I think ear introvisions are gonna be good and valuations are attractive,

and I'd love to get your thoughts. I'm a former sell side equity research channels, and I know what I've been hearing a lot over the last you know, decade in particular sense of financial crisis, is that the equity research from Wall Street on small and mid cap stocks is as really declined in terms of how many names are in fact covered. How does that impact your job on the bi side as you think about, you know, doing research analysis on the names of you guys invest in. Yeah,

that's a great question. So, as you mentioned, there's been a big dislocation on the cell side covering our stocks, which has made those stocks a lot more inefficient. So it's made our job easier, which is why it's been easier in general for active management to our perform in particular product. We see that as being the case going forward. There are a lot of reasons why why that's the case.

Commissions have been tougher to come by in general, Compensation for sething Elysis dropped significantly, and so it's just given us more of an opportunity to find stocks where the earnings estimates are inaccurate. Looking out well eighteen twenty four months, so you're looking at Western Alliance, Chart Industries, Coulica, and Cepha, what what what do you like specifically? Are those are some of the names that we like. We like Western Alliance.

It's a regional bank that trades it around twelve times earnings. The street has about nine dollars and worty cents for next year. We think that's really low as they continue to grow loans and the north of twelve range. Uh. We like Chart Industries, as you mentioned, it's an infrastructure provider for all sorts of chemicals and gases. And what's growing the fastest there is hydrogen and there's big demand

for green hydrogen. Is is the economy more moves to more sustainable energy and it's relatively inexpensive, especially in comparison to other hydrogen plays like plug power and Coolic and Sofa is a semiconductor capital equipment company. Specifically, they make wire bonding equipment and that that's as you've seen the news all over the place, there's been a big shortage there they had great earnings, uh, and they guided to a little north of two dollars per share next quarter,

and the street was at a dollar. So obviously that stock has been acting well and it's still cheap around twelve times earnings there as well. Broadly speaking, when you look at the small cap universe, is give us a sense of kind of where we are in terms of historical valuations because ones a lot of fun managers will come on here and say, boy, it's a twenty times forward earnings. That's yes, that's high, but interest rates are so low, so you know, it's not that big an issue.

How do you think about evaluations in small cap land? Yeah, so, as I mentioned earlier, relatives multiples have compressed significantly. So what I tend to look at is the the earnings, the positive earnings companies in the index, and what the valuation is there versus the benchmark. And right now that's at parody with the some ps about twenty times next

year's earnings. And there's always this large swath of non earnings companies like biotech, and it's a little bit harder to take a swag at that, but we usually are underweight that area. So that's one of the reasons why I like small cap is that when you look at the relative valuation versus the SMP and the higher growth and the higher concentration of domestic focus here in the US, I think it can outperform. What's your screening technique? What do you do uh to start looking at these companies

bottoms up? So most of it is just organically talking to a ton of companies. We talked around for Warner. Companies popetrated every single quarter. So really it's just putting together mosaic in terms of how the business is doing and comparing that versus where the streets doing. And obviously those are businesses that we want to be a part

of long term. We're looking for companies that are growing north of that have leading market share the in an industry that's growing, and most importantly, have a management team that's going to deliver. We do have some screens that look at the fundamental data and the odds of them exceeding analy assessments over the next twelve and twenty four months. That's but that's really more to stop gap. Again, it just comes down to just having a lot of conversations

and talk to a ton of people. Brian, thanks so much for joining us. Brian Smallock, there is the principal and portfolio manager at hood River Capital Management, coming to us out of Florida. Of course, he's a long career in banking. Started it, Sally, this is Bloomberg. Now let's get back to r T oh. We haven't talked about

returning to the workplace over the past couple of sessions. Here, let's bring in Shawn Lyons, Global Chief executive Officer at r G A Sean are we are we looking at a future where it basically goes back to the past. Are we going to all eventually go back to our offices, get back on plane, start our long commutes and just forget about the hybrid work that we did over the last couple of years. Well, hi, Paul, I thank you for having me on. I hope not. I really hope not.

I think there's too much binary thinking right now in terms of back to office all remote. I think there's a real benefit of of how we've all worked in the past year and a half. I think the tremendous benefit to the technology we've we've used, the diversity of

talent we've been able to pull into the company. So I'm we're we're all in on hybrid and I'm all in on the actual long term benefits of a hybrid model, which I think, you know, while maybe require a lot of thought and and burden on management to manage, I think the benefits and the long term we're just gonna be tremendous. So we're fully embracing it. Yeah, it's interesting here in New York City, and obviously Bloomberg we focus

a lot on the big financial institutions. Uh, they were talking, some of them were talking a big game about getting people back in full time all the time, and they since push back some of those dates. What are you seeing at there from some of the leading companies about how they're thinking about their back to work. Yeah, I mean I think we I think generally there's a like I mentioned, there's some short term thinking happening right now.

There's there's some fear involved in this, which is, how do I make sure I can monitor the proctivity of my employees, how do I make sure that everybody can work together and build team chemistry, because we know how that works in an office environment, It's it's a little bit more unknown when you think about it from from a hybrid of remote environment, but we actually like to think about it as like, well, how do we look at this creatively, where's the opportunities in here where we

can actually attract more talent in more places. Where in some of the biggest cities in the world, with fifteen locations, some of them are quite expensive to live in, we now have an opportunity to hire from more broadly, So we're looking at that as an opportunity, I think. But I do think some of this is just based on the concern and fear that leadership has on making sure they can keep everything going, make the machine work, and make sure people are engaged at work every day. I'm

not really that that that concerned with that. I think that people are happier when they have a choice, and I think having a physical environment that they can go to and work in, because that's important. I'm also having the opportunity to work remotely at home or somewhere else is equally beneficial, So we fund it as a tremendous advantage for us. You have, over your twenty year or so career, worked with at r g A and havas

huge clients. Ibm um her she's Nike Liberty, Liberty, Liberty. Um. Where do you see the biggest success stories in terms of current workforce model? You know, I haven't actually looked at different models to try to follow. I've actually looked at what we need to do, and I've done that deliberately because I think this is so new. It's still new in terms of where we can actually learn from the last year and a half has been remote work.

Only nobody would design it that way along, but you really need to do need to think about how you can do the great physical environment where you bring people together and also then kind of combine that with it with great digital tools so people can collaborate and work remotely together. UM. But we found is that our relationships is our clients in many ways have gotten better when

we've worked in this way. There's more frequent communications, there's less burden on that one trip you need to take for a two hour meeting, which everybody understands doesn't make sense anymore. So this Harvard work model remote work is actually I think improves client relationships. They've been quite flexible.

We're actually going to monitor what each of our clients is doing as we go along to make sure, we understand how they're they're gonna roll out their plans, but I think for us it will be an advantage for us, but also for them because they're gonna get to work with a kind of broader and more diverse team. And sometimes that means, you know, time shifting, where we have teams working in the US for setting number of hours and we can shift the work over to Asia Pacific

to continue that work. So that there's benefits to to uh to the model that we're hopefully going to bring to our clients. Sean just thirty seconds. Um, what do you think is the ideal model? Well, I look at e commerce as a example here, right, so everybody has been used to being in the office for what sixty seventy years, just the same kind of method of work

where everybody shows up nine to five. I really think if you look at the sweeping changes that happened in digital commerce over the past twenty years, how it forced evolution in retail. So the retail was hit by that, we know that, but it also forced companies to think about what their retail environment spaces was about, not just

about shopping should be an experience. So I do believe this is going to require innovation within the physical workspace that's going to benefit everybody, and that's what I see is the biggest change. Hey, Sean, thanks so much for joining us. Really appreciate getting your thoughts in perspective. You're on a really key topic for corporate America. Sawn Lines, Global chief executive Officer for r g A. Thanks for

listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller V three and on ball Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio