The nine themes that Ross Gerber, president and CEO of Gerber Kawasaki Wealth & Investment Management, focuses on in his investing include — in his own words — “things that used to be illegal”, namely cannabis and online gambling. As you might expect, the theme closely follows shifts in the regulation of these industries and opinions about them.
Laws such as the Professional and Amateur Sports Protection Act (PASPA) and the Unlawful Internet Gambling Enforcement Act (UIGEA) effectively made online gambling an underground industry outside Nevada, until PASPA was overturned in May 2018. Since then, online gambling has proliferated in the US and is now legal in nearly 25 states depending on the nature of betting.
Cannabis, meanwhile, has gradually become decriminalised for recreational purposes in 19 states since first being decriminalised in Oregon in 1973, and it’s legal for medicinal purposes in 36 states, having first been legalised in California in 1996.
“The gaming sector, in general, has always enjoyed fairly solid recurring earning streams — these earnings streams also tend to be more defensive than most other sectors” - Daniel Moore, senior equities analyst at Investors Mutual Ltd
While institutional investors love the growth prospects of this theme, it is also hugely popular with retail investors. Meme traders helped cannabis stocks such as Tilray [TLRY] and Canopy Growth Corporation [CGC] surge in February 2021.
Despite their growth potential, both strands can be viewed as defensive stocks. Jason Wilson of ETFMG, which manages the ETFMG Alternative Harvest ETF [MJ], a cannabis-themed fund, said in 2020 that his firm “saw some stockpiling in cannabis in the early days of the pandemic as sales spiked”.
Similarly, Daniel Moore, portfolio manager and senior equities analyst at Investors Mutual Ltd, has previously said: “The gaming sector, in general, has always enjoyed fairly solid recurring earning streams — these earnings streams also tend to be more defensive than most other sectors.”
Cannabis stocks the new alcohol?
Right now, Gerber is “super bullish” on cannabis stocks. “Sales are through the roof,” he said. “They’ve already built an amazing industry, whether it’s Green Thumb [GTBIF] or TerrAscend [TRSSF] or Trulieve [TCNNF] in Florida. These are great businesses with great CEOs making tons of cash flow.” Gerber expects the segment to mature over the next ten years, much like the alcohol sector.
The Green Thumb share price gained 22.4% in 2021 to 24 August. However, the TerrAscend share price descended 24.2% during the same period, while the Trulieve share price fell 13.5%.
Gerber also has his eye on psychedelics. “I think there’s a lot of psychological benefits to LSD, if used correctly,” Gerber said, adding that it held particularly relevant given the current rise in mental health issues.
However, for now Gerber is less excited about online betting stocks. “As much as I’m bullish on online gambling, now everybody’s in this business, there’s so much competition. So we actually don’t have a lot of positions in this right now.”
“As much as I’m bullish on online gambling, now everybody’s in this business, there’s so much competition. So we actually don’t have a lot of positions in this right now” - Ross Gerber
The market for online gambling breaks down into two types of gambler, Gerber explains: Degenerate gamblers, who are the people who lose and keep gambling, [and] responsible gamblers, like [Gerber], who will lose a certain amount of money and stop. “80% of people lose every day on DraftKings [DKNG]. How sustainable is that business?”
Gerber feels that even keeping gamblers hooked over longer periods isn’t financially viable. “Gambling businesses function around comps: what do I give the gambler who loses so that they don’t feel as bad? In Vegas, you get rooms, you get food, you get entertainment.”
In the past, this “Vegas ratio” costed comps [complimentary items] at about 10% of a gambler’s losses. But, “the way it works now is, if you lose 1,000 bucks, they comp you back like 1,200 bucks. They’ll do anything to keep you gambling, because everyone wants to show rising gambling metrics.”
What the future holds
The attention of meme traders wasn’t necessarily a positive for cannabis stocks overall, legitimising a narrative that says the sector is overpriced. Stocks have fallen this year as US president Joe Biden’s plans to legalise the drug at federal level have progressed slower than expected. However, with federal legalisation still highly probable, most commentators are bullish on the theme, though not all as exuberantly so as Gerber.
Cathie Wood’s Ark Invest, which Gerber referenced when he spoke to Opto, has a more bullish outlook on the online betting field. A recent research paper published by Ark anticipates online sports betting growing 10-fold over the next five years, from $18bn to $180bn.
Estimated valuation of the global cannabis industry in 2026
The equivalent metrics for the cannabis industry look just as promising. According to ResearchAndMarkets, the global cannabis industry is set to grow from $20.5bn in 2020 to $90.4bn in 2026, at a CAGR of 28%.
The first cannabis-based ETF was AdvisorShares Pure Cannabis ETF [MSOS]. Now other fund managers have joined AdvisorShares, from the Global X Cannabis ETF [POTX] to the Amplify ETF Trust [CNBS]. VanEck and Roundhill are the most notable names to have launched pure-play sports betting ETFs, with the VanEck Vectors Gaming ETF [BJK] and Roundhill Sports Betting & iGaming ETF [BETZ]. In theory, Gerber’s ETF —the AdvisorShares Gerber Kawasaki ETF [GK] — offers exposure to both strands of the theme, but isn’t currently holding any online betting positions. Its cannabis exposure is derived from the AdvisorShares Pure US Cannabis ETF, which is weighted at 3.66% of the fund as of 23 August.
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