While hopes of US federal legalisation of cannabis were dampened over the past year, Tim Seymour, portfolio manager of the Amplify Seymour Cannabis ETF, retains a bullish perspective on the market, arguing that this high-growth industry is already worth $100bn. In the latest episode of Opto Sessions, Seymour discusses the opportunities and challenges of investing in cannabis.
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Tim Seymour is the founder and chief investment officer (CIO) of Seymour Asset Management, as well as the portfolio manager of the Amplify Seymour Cannabis ETF [CNBS]. He has spent the majority of his career investing in emerging markets and new asset classes, and has previously worked for Red Star Asset Management, for Russian investment bank Troika Dialog, and for CNBC as a trader and market strategist. Seymour was also the co-founder and CIO of Triogem Asset Management.
As well as managing Amplify’s cannabis ETF, Seymour acts as an advisor to multiple cannabis companies.
“Cannabis is an industry where the addressable market continues to grow, independent of the federal legislative framework,” he told Opto Sessions on this week’s podcast episode.
According to Seymour, cannabis is a new industry with high growth prospects. Over the long term, he views the market as one that will become “a very sophisticated traditional consumer industry”.
“Cannabis is an industry where the addressable market continues to grow, independent of the federal legislative framework”.
His background investing in emerging markets equipped Seymour with valuable skills for investing in cannabis.
Having lived in Russia and invested in Latin America and Asia, Seymour learned that “a lot of your return profile is driven by the macro or by catalysts related to either the legislative environment or global dynamics around currencies or interest rates”.
Cannabis in a macro context
Investing in cannabis is, says Seymour, “on some level very much about progression of legislation”.
However, his time investing in emerging markets taught Seymour the dangers of relying on favourable macro conditions playing out, and his cannabis strategy takes into account the uncertainty over federal legalisation in the US.
“You really need to know the companies you invest in,” says Seymour. “You need to have the confidence that these are companies that are going to survive difficult macro, and maybe lack of access to capital markets.”
The scale of the potential US market in the event of federal legalisation is considerable. Seymour estimates it at $100bn, and is more confident in that figure than it is possible to be about many growth sectors, because he includes the current illicit trade in the total.
“You need to have the confidence that these are companies that are going to survive difficult macro, and maybe lack of access to capital markets”.
“Cannabis doesn’t need to open up the eyes and ears and consumption patterns of more people,” he says. “People have been consuming cannabis forever.
“When I talk about a $100bn addressable market, in the US alone, I’m really just talking about the market that exists now, not the market that we want tomorrow.”
Nevertheless, high hopes at the outset of Biden’s term faded, as the Democrats have been unable to agree on legislation to pass impactful cannabis reform through Congress.
This has hammered cannabis stocks, and CNBS is down 65.1% in the past 12 months. Seymour, however, finds the slump ironic.
“In the last couple of weeks, we’ve had Kentucky become the 38th state that signed on for a medical market… that will probably come online sometime in late 2024 or early 2025.
“75% of the US lives in a place where cannabis is legal in some form. The wheels keep turning in the march onward for the legislative process, state by state.”
Considering cannabis investments
The Cannabis ETF offers investors pure-play exposure to cannabis companies; 80% of its portfolio is comprised by companies that derive 50% or more of their revenue directly from the cannabis ecosystem.
Some 70% of its exposure is to US companies, with Canada also forming a major component.
“Canada was the first country to federalise in a way that was significant,” said Seymour. That created “a lot of mismatches” in terms of the size of the Canadian vs. the US market.
This was previously a source of tension. “At one point, Canadian companies could list on the New York Stock Exchange, but US companies couldn’t. Canadian companies had market caps five times the size of US companies, yet their market is $5bn while the US market, even the legal segment, is five times that.”
Despite the opportunities, Seymour is clear that cannabis is a challenging industry to invest in, even without considering the legalisation question.
“What I hear most from my friends that are investing in other sectors,” says Seymour, “is ‘I’m not so worried about headlines around federal legalisation, or stigma. My biggest issue is that I don’t know what the margin profile of the industry is. I don’t know what multiples these companies should trade at, even in a world where they are legal. Are there really brands, or is cannabis a commodity? Is it discretionary, or a staple?’”
These questions, for Seymour, are part of the evolution of the industry.
The wall of capital
While Seymour stresses the importance of investing in cannabis without relying on the prospect of future legalisation, there is no denying the transformative impact that it would have on the industry. The most significant potential impact would be the institutional capital that could be brought to bear on the industry.
“I think investors that are investing today are ahead of this wall of capital,” he says.
“At some point, cannabis will come of age, when not only high-growth, small-cap investors, or investors that have a unique mandate to invest in cannabis [are investing].
“The real coming of age will be when consumer packaged goods investors, analysts and big funds actually want a 1% piece of their portfolio in cannabis. That’s when you’ll know the industry has come of age. And that’s the institutional wall of capital I’m referring to.”
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