Last updated on December 1, 2022
This podcast episode brought to you by Covey — Covey is designed to find, reward, and train the next top investment managers —from any background—that anyone can copy, so everyone can win.
Todd Sullivan of ValuePlays.com rejoins the podcast to discuss oil markets and the investment case for cannabis.
Sullivan’s call for $100 oil last year turned out to be prescient. Oil prices have retreated from their peak, but that will be short-lived, he says…
(This episode was recorded Sept. 22, before the recent rebound in oil prices. Premium subscribers get an early actionable highlight clip of the podcast along with earlier release of the full episode — and a host of other benefits. More on our Substack or Supercast.)
Content Highlights
- Fears of ‘demand destruction’ have led to the decline in oil prices, but risks are tilted toward prices moving higher again. Production is not coming back (3:48);
- How much of a concern is a slowing Chinese economy when it comes to oil prices? (10:14);
- What about stocks? Sullivan continues to like pipeline companies… (16:00);
- The investment case for cannabis: Overview (27:03);
- The only thing that will unleash capital on the cannabis industry is decriminalization (31:46);
- What to look for if you are looking to buy and hold cannabis stocks and two of the guest’s favorites (34:30).
More About Todd Sullivan
- Website: ValuePlays.com;
- Twitter: @ToddSullivan;
- Covey portfolio.
Quick Highlights from Our YouTube Channel
Transcript
Nathaniel E. Baker 0:14
Todd Sullivan. of valueplays.com. Thank you for rejoining the contrarian investor podcast.
Todd Sullivan 0:43
Great, thanks for having me.
Nathaniel E. Baker 0:44
It’s been a year just about I think, 11 months or so since you were last on the podcast
Todd Sullivan 0:48
really?
Nathaniel E. Baker 0:48
I believe so. October of ’21, when you came on the show, and told us at the time, the very unpopular pick to invest in oil and you provided the at the time outlandish prediction that oil would go to $100 a barrel? Well, you did not predict could nor could you have the Russian invasion of Ukraine, but we could certainly say that oil was headed there anyway. Now, the question here is, because oil has had a great first half of the year, and more recently has kind of sold off a bit. And so the question is for you, if we go back to the highs and oil, or if we continue to tread water, and maybe head lower. And that’s the first thing and then second of all, we have some stocks in there. And then also for the second part of the show, we want to talk about cannabis. But that’s a whole bunch of stuff. But let’s start with with oil. First, your views there.
Todd Sullivan 1:42
Whenever I look at oil or natural gas or those stocks, I always start my premise with what’s what’s, where’s the where’s the biggest risk? So in this situation, is there a larger risk? That oil goes higher? Or is there an a larger risk, oil goes lower? Right. And that’s kind of kind of how I, I look at things. And when I looked at it October of last year, I didn’t see any way out oil could go down from what it was like they’re excluding the Russian invasion, that was not even part of the thesis at that time. It just the fundamentals of the industry, especially here in the US, I just did not see a scenario how oil was going to go lower. So I thought higher prices. And that was really based on the rhetoric of the administration, early actions they had taken and stuff like that. So I still do think right now, that the the risk of oil prices is much higher prices than there are right now, production is not coming back, people seem to think that oil production is flip a switch. And we can just add 100 rigs in the Permian and start pumping out another two or 3 million barrels a day. That’s just not how it works. This is like an ocean liners, not a speedboat, it takes a long time for the industry to restart, when it’s been shut down to levels like it was during the pandemic, when basically a lot of the workers left left the country. I mean, we’re not talking, you know, we’re not talking when you got a job at CVS around the corner, there don’t exist in this country anymore. They left and then you added the invasion. And now, you know, people argue now that we are due for a recession, and that’s going to kill demand. And that I think that’s what’s driven prices from where they were to where they are right now is this expectation of demand destruction from a recession? I think that is a much less risk than the risk of something another shock that drives prices significantly higher, or continued irresponsible fiscal policies out of Washington, that flood the markets, right? They flood the markets with dollars, and that drives the price higher also. So I think there’s you know, and we don’t know what’s going to happen in Ukraine, right? I mean, experts will disagree with it’s gonna happen, but we all know, Putin’s a wildcard. So we cannot definitively say he would never do A, B, C or D, right? He may decide hey, I’m not going to go in Ukraine, Yugoslavia here I come right or he may you know, he may decide to open this thing up in which case we get another shock to the oil market there’s gonna be additional sanctions and things like that. Europe is already suffering with their gas prices and I’ve seen gas prices up to 16 100% in some areas in the summer that’s uncomfortable because you sweat a lot in the winter people die right people freeze to death in the winter and I think we have a very bad again depends on the weather this winter, right? But if we have a cold winter, both US and Europe, there’s gonna be a lot of human suffering that’s going to cause some additional actions on the on the by governments around the world. And typically those actions aren’t good for prices, right? They’re gonna do some sort of moratorium, price caps of a block price caps just destroyed production, right. So we’ll see what happens but I think the definite right excuse for higher prices and the real risk is for substantially higher prices. I don’t see any risk at all of us being back around 30 $40 A barrel anytime soon, anytime soon.
Nathaniel E. Baker 5:10
Do you have a target for the upside?
Todd Sullivan 5:13
I think we can go as high as $150, $175/barrely. Really won’t take much, you know, any kind of skirmish in the Middle East, right? Iran decides to act up in the Strait of Hormuz for a couple of weeks, you’re gonna say oil, so you’re gonna see oil, we already we’ve drained 30% of the SPR in the US. Alright, we’ve never done that before the SPR has never been drained as fast as being drained grayed out and our history. So that’s a scary thing. At the current pace, by this time, next year, almost 70% of the SPR be gone. And that’s been the emotional sort of bumper for oil prices. When they jump off, we’re gonna release a million barrels from SPR, which is a drop in the bucket. But it has an emotional calming effect on the market, the ability to do that is running out number one, and number two, people are gonna start to panic when you see the SPR being drained like that, you’re gonna see panic, right, where you’re gonna see an oil trader say, hey, you know what, year two, the government’s got to refill this sucker. So I’m going to start buying oil futures out into the future, right, so that the government starts buying this stuff back to refill the SPR at higher prices, which is what they always do, they’re gonna capitalize on it. So that’s the risk, and not many people are talking about the higher prices. So we have a crazy permanent person and Putin who could do whatever we have, you know, I think this is probably one of the longest stretches we’ve gone with, as far as once you say peace in the Middle East, right or calmness in the Middle East. And then you have government’s reactions to various things that could happen. So I don’t, I would not be at all surprised to see prices that high and and the industry now that the industry almost went bust. A few years ago, when prices collapsed. And they learned their lesson and investors and debt providers learn the lessons the industry, the industry is not allowed to leverage up like they used to. And when the industry can’t leverage up like it used to its spending is really constrained. And when you have times where you need rapid expansion, of drilling of shipping of oilfield services company, they can’t expand as fast as they have in the past. They can’t meet that demand, especially in the past, because they don’t have the access to capital, like they had in the past to do that expansion. And that’s something that that’s not their fault. That’s just the market that dictating that, and honestly, it’s it is the government’s reaction, right. So when the banks got in trouble, they got bailed out. Right. When other industries get in trouble, they get bailed out. Nobody cares if XYZ oil company goes under, they don’t get bailed out. So they have, you know, they are the ultimate market. Right, we think about it. So they’ve they’ve self policed themselves out of out of that we don’t do it, we’re gonna go under, we have to, there’s no bailout for our company, coming from the US government, right? We don’t know that’s never going to happen. So they have to be responsible and prudent, which means when desperate times hit like it is right now. They can’t get over their skis, financially to meet that demand. Because if that demand doesn’t materialize, or drops, they’re screwed. And that’s just policy. Right? That’s policy. We said, a little companies, you’re on your own, we actually actually said to them, we want to destroy the oil and gas companies, right? That’s what our incoming administration said, We will destroy oil and gas, we’re gonna destroy these jobs. We’re gonna destroy coal. Well, if you’re told by the administration, for the next four years, their guns are out for you, you are going to do what you’re going to turtle. You’re going to hoard every penny you got because, you know, there’s nothing common if shit hits, hits the pan. So that’s what’s happening. And it’s a combination of all these effects that have when I looked at PayPal anonymous, but when I looked at October, I said, just absolutely no way oh, can go any lower. It has to go higher with any type of economic recovery. And, you know, it’s to me, it was an obvious straight.
Nathaniel E. Baker 8:55
Yeah, let’s talk about the demand picture, though. Specifically, you know, the biggest consumer of oil is China, I believe. And they have these COVID shutdowns and which is, which is part of what’s hurt the prices here too, I believe. And what what is the risk that they have all kinds of problems in our real estate market? And potentially a lot of other stuff under the surface? How much of a concern is that? How much are you factoring that in? Because that would be some pretty big demand destruction? Right there, wouldn’t it? Yeah, so
Todd Sullivan 9:27
I mean, I think we kind of hear about a many China implosion every three to five years, right? Yeah. I mean, I I’ve been really on Twitter and in the public game since 2007, talking about stocks. And I think Chinese real estate’s been collapsing since 2007. It’s the longest slowest unrecognized collapse in the history of man and and when they got bored in China, they just started buying us real estate left and right, right. And not only here in Chinese buyers was selling us real estate at a pretty rapid clip to make up for what’s going on at home right now. China is so big, and they require so much for energy. I think the demand destruction or put oil play for China is really overblown. At the end of the day, China is an emerging manufacturing company that has to do some oil for anything that they do. I know they burn a boatload of coal for electricity and things like that, but they really can’t function without oil. I don’t see a scenario. And I think we both know, they’re buying Russian oil, you can say what you want to say about Russia’s bringing it through Ukraine or bringing it to it. I’m afraid that Ukraine, other countries, they’re robbing their oil through brush, it isn’t stockpiling 10 million barrels a day of oil. You know, it’s going someplace China’s getting our oil. So I’m not. I’m not overly concerned about the China, but I would be more concerned about a severe drop in the US economy that I would be in China. As far as oil demand goes. I mean, we are the per capita largest user of stuff in the world. So okay, it’s that that’s a far bigger concern for me than something going on in China. Because despite, yeah, despite China shutdowns over again, China’s still growing, we’re not growing in the US right, now. We’re gonna go on our third quarter of negative, more flat growth, right, depending on what you believe, for the Dow looks for q3 for this current quarter. You know who it was 2.4 GDP a month ago, they yesterday I saw point to their rise to down to only a matter of time where they revise that below. And we have three quarters of negative growth. And maybe at that time, the government will administer recession. They’re going to change the depth and definition of recession again,
Nathaniel E. Baker 11:34
I don’t know. But but you do see the risk in the US. So walk me through that. How would that play out? So basically, it’s just like you have a slowing economy, which leads to less demand.
Todd Sullivan 11:43
Typically the playbook is, you know, recession, hence, people lose jobs, people stopped driving oil demand falls, right. That’s typically the scenario that happens. The difference now is that we’re not we’re not coming off such high levels. And we seen a fundamental shift in the economy. As far as people being employed, right? People are working from home more now than they were a year ago, two years ago, dramatically. So right, more people are self employed. There are multiple jobs right now. And a lot of those jobs are remote. It don’t require you to be in a car every day. So while the old playbook was if we drop, you know, X percent of GDP, we can expect X percent drop in oil demand, I don’t think that ratio holds so much anymore. So I think we’d have to see a substantial recession in the US not one of these one or 2%, negative growth for a couple quarters, which is technically a recession. But it’s you know, most people don’t feel that most people are feeling inflation, rather than losing the job from recession. I think it would require six 7% negative growth for a couple quarters before you really start seeing stuff like that. Because then then you’re talking about, you know, you’re not going to see the same correlation with consumer demand. But you would see a correlation at those levels with trucking Demand training, things like that Jeff was starting to fall because travel was starting to fall. You know, despite the fact we’ve had two quarters negative growth, air travel isn’t slowing down. Right. And that’s a pretty big use of oil, right for jet fuel and stuff like that. So, again, you know, I do think we’re in a recession. I do think it’s mild. I think the odds to that are it gets worse, not better. But I don’t think you know, I don’t you know, people want to go to Oh, 809 You know, people love to everyone wants to be the make the dramatic call. Right? So they could do a victory lap if they’re right, but I don’t with a homeowner equity is too high home prices have increased too much. And bank lending. The last 10 years of last 12 years since a way toward seniors. Yeah, listen, so Jesus that long ago, you know, bank lending now compared to that is is like day, I mean, you can’t even compare the type of loans that are out there now worse than the liar loans. They don’t exist and stuff like that anymore. So, you know, you may see something, but it’s not going to be a sir. And we both know that. The government is going to pump more money out there. If that does happen, because you know, we have elections coming up. And they’re not going to do everything humanly possible to stop the official recession call before midterm election. So they’re gonna put more money in the economy. So I think actually, the risk is higher inflation, higher places because of government policy, that lower inflation and lower prices.
Nathaniel E. Baker 14:28
Wow. Okay. All right. What about stocks here? What kind of what do you like?
Todd Sullivan 14:32
So I have loved the pipeline stocks, especially Kinder Morgan and Williams for a long time now. I like occidental on the on the refinery stage. I mean, no. Buffett seems to wake up and have his ethnic muffin for breakfast and 10 million shares of Occidental Petroleum. I mean, it’s just it. He’s been doing it for years. And, you know, I, you know, I think he was ahead of this oil play even before I was in October. I mean, he’s been buying oxygen battled for quite some time in the refinery space. You know, it’s funny whenever you see oil prices that the administration comes out says drill more, drill more, produce more produce more. refineries are running 95% capacity. It’s not like we have refineries sitting idle, not producing oil, not processing oil into gasoline or other or other other products, right, they’re running flat out. We can’t build more refineries. That’s the problem. pipelines, you know, other than the state of Texas, you really can’t build a pipeline of any substantial size in the US right now. Look at if you look at the northeast United States, okay, I live in Massachusetts, we pay three to five times what Chicago pays for natural gas blast, I love that fluctuates wildly, I’ve seen 10 times what we pay in the northeast, we sit 200 miles from the Marcellus Shale, which is the largest natural gas formation on the face of the earth. And we pay higher higher gas prices, why we can’t build pipelines to get here. Every major pipeline project on the East Coast has been killed by democratic governments or environmentalists or these regulations about a frog that might be displaced. So people are paying and you know, it’s funny. Energy policy that is not based on lowering the price of energy, increasing access to energy hurts the poor. Because all it does is increase prices. It is a tax on poor people. There’s no rich person sitting, I’m stressed out, because electric bill went up 300 bucks a month, or doubled in the last month, which I know I know about you. But my electric bill doubled over last summer this year. You know, millionaires aren’t worried about that, right? It’s, it’s this everyone who’s going out there making 1920 bucks an hour or less, who’s giving up things now, to heat to cool their home in the winter, that’s going to be a real problem come this winter, and we’re going to see stories, it’s going to help people, it’s not going to be pretty, because they’re not gonna be able to afford to heat their homes, or, or buy food or do anything. So it’s gonna get ugly. So I love those stocks, but we’re not building any more of those things. So you have a, you have a resource and oil that more is pumped every year more needs to be processed every year. But we have a finite transportation. That’s network right now. And we have a finite processing network right now. So to me, if you’re gonna sit someplace long term, 70% of us natural gas is touched by two companies, Kinder Morgan Alliance, buying those two stocks, you’d basically have monopoly in natural gas transport in the US right now. And oh, by the way, last time I checked, they’re paying 60% dividends. Yeah. So I mean, to me, yeah, to me, and, you know, I know the you know, the the MPL, the pipeline industry got themselves in a lot of trouble again, 14 years ago, before, you know, religion was impressed that the industry about spending and debt, things like that, but both Williams and Kinder Morgan that compared to C corpse, so you’re not dealing with that k one crap on your taxes anymore. They’re both solidly have fixed their debt issues. They have four and a half times coverage, they have two to three times dividend coverage. These are rock solid financial companies that are operating in an industry where there’s no more competition coming. The only way you compete with us right now is through acquisition. You can’t build a company in the US right now to even remotely come close to competing with those two companies right now, without purchasing your way there, which would cost hundreds of billions of dollars in acquisitions? Yeah. So I mean, for the next five years, I mean, to me, it’s, I think I said this on the last show, it’s like the Mass Turnpike is the only pay highway in Massachusetts. If you want to get from Boston to Albany, New York quickly, you got to take the best bike. Every day, more and more and more and more cars travel on that, on that Thruway every year they raised suppose that’s what a pipeline company is. Every year more and more gas goes through Kinder Morgan and waves pipelines. And every year rates go up a little bit more, and they just sit on the collect that pole, they do the little, little expansions off those main lines that they have. Kindle market is massive in the Permian, the monster, the Permian Basin, and then Williams owns the southeast and Northeast United States. So you got two thirds of the US cover those two companies, massive natural gas and oil shippers. So I mean, for me, that’s a nice, safe, high yielding place to go.
Nathaniel E. Baker 19:33
Yeah, but I mean, if with capacity at 100% or so, I mean, wouldn’t they need to increase capacity and, you know, you know, do some capex or something?
Todd Sullivan 19:45
The refiners, they’re doing dispatches on their existing lines.
Nathaniel E. Baker 19:49
They are
Todd Sullivan 19:49
okay. On their existing property when a lot but no one’s building a new refinery. Yeah, I think the last fuel refinery that was built in the US was in the 70s. So all these refineries are 20, 30, 40 years old. And that’s why we’re never at 100% capacity. They’re always doing shutdowns, there’s always a shutdown for maintenance. Because we have all these different blends of spring blends winter blends California has seven different blends of gasoline that they have to mix for the state. It’s not, again, it’s refining it’s not okay, push this button, we’re gonna refine it different now. No, it’s finished this run clean the machines that it goes down for maintenance, then it starts back up will be blend that new blend it gasoline. So there’s always downtime because we don’t have a cohesive energy policy. The US we have different energy policies, different states, different states require this is amazing that different states require different blends of gasoline, there’s no there’s no national policy for gasoline in the US. Do you know how much more gasoline we can refine or produce? If we didn’t have to stop every six weeks or every four weeks to retrofit a refinery or rebuild a refinery for different blend for different state? It’s stunning. But are NSC colleges a mess? So? Yes, so the short answer is yes, they can add capacity. But that takes years. It takes years to add refining capacity, just the permitting process alone can take a year or two.
Nathaniel E. Baker 21:09
So what have you got to go missing here with these stocks? Like KMI I have watched pretty closely and it’s kind of a bounce a bit certainly since the last time we spoke, but it kind of hasn’t. It’s dropped back down again, along with Oh, yeah.
Todd Sullivan 21:22
So I think the biggest misunderstanding of those two pipeline plays is that their MPLS I still talk to people they’re like, I don’t I don’t MLPs I’m sorry.
Nathaniel E. Baker 21:30
MPLs. Master Limited Partnerships
Todd Sullivan 21:35
Yeah, MLPs. And they’re gonna get a K1. They hate that no one likes getting K1s and explain that these are C corps. They all do the conversion. Right after the 06 to 08 collapse in the in the industry. A lot of them converted to C corps to eliminate that scenario for investors. So I know a lot of guys wouldn’t hold them in IRAs, because there was a hassle of that, but that no longer exists. That’s gone right now. And honestly, the boring. Yeah. No one goes to the bar and talks about the pipeline companies that they own. Yeah. Yeah, but I mean, hey, if I could, if I could pump out five to 10% annual increase a six to 8% cash dividend that I can reinvest every year. That’s that adds up pretty quick over the course of 510 years. It really does. So
Nathaniel E. Baker 22:23
cool. Nice. All right, great. Todd Tobin, I want to take a quick break, and come back and ask you about something completely different, which is cannabis. So what you also have a focus on, but let’s first take a break. If you are a premium subscriber, you do not get the break. Don’t touch the dial. We’ll be right back. In fact, we already are.
Nathaniel E. Baker 22:45
Welcome back everybody here with Todd Sullivan valueplays.com. We spent the first half of the show talking about oil. And now I would like to shift focus to a higher plane. Now I was trying to figure out to work in the cannabis you know. Wondering why you Yeah, it didn’t work anymore. But anyway, but let’s talk about this cannabis. Yeah, I know very little about this from an investment standpoint, except that it attracted a bunch of hype seems like a couple years ago now and it’s kind of done now now. Seems like crypto is kind of overtook that. But yeah, talk me through this. What’s what’s the what’s the strategy here?
Todd Sullivan 23:25
Yeah, so cannabis rolled out legalization with the Canadian companies was 2015 2016 something like that stock simplistic because the investment world figured that, you know, everyone smokes cannabis. Everyone loves it, everyone’s gonna want it. It’s going to be hugely profitable. The problem was no one ever actually bothered to look at the rules of the game. Alright, and the rules of the game are Canadian cannabis is locked in Canada, they come into the US. The US does not have a cannabis market. It has 50 individual states with 50 individual sets of rules. So there are no economies of scales and cannabis right now on a national level in Canada there is there’s no Canadian companies, honestly, that I think are really worth investing in because the regulations in Canada. It’s inefficient, let’s call it that way. Let’s not insult the Canadians. Let’s call it ambition. Lousy regulations will make for a lousy business cycle structure. And if you look at the fundamental results of the Canadian companies versus the US companies, it’s an exciting day. So I wouldn’t even touch any Canadian cannabis companies right now with a ten foot pole.
Nathaniel E. Baker 24:36
Even though Canada has a marijuana leaf on their flag?
Todd Sullivan 24:40
They do. They were the first country to legalize it. It’s readily accessible already available. The problem is you have private production of cannabis in Canada. Very, very laissez faire, the very few regulations, very few restrictions, very few limits on it. And then in the Provinces you have public distribute should look in Quebec, the government owns the dispensaries. So anytime, anytime in history, you have that dynamic. It’s never a good business environment, right? Because you have people who, at the bottom end who care about price comparable quality care about distribution at the end, but the end user, the dispensary doesn’t care about any of that. Because they’re a government organization. They don’t give a shit just to process transactions, right? So you’re never going to develop a robust good market and the funnel and the results of the Canadian companies have proven that versus the US now when this flips, legal and there’s inter international transportation of cannabis and I have no idea how that’s gonna take. Maybe that situation changed because most private growers in Canada will have additional markets other cannabis into but that’s, that’s down the road, and I’m not very optimistic that happening anytime soon.
Nathaniel E. Baker 25:52
All right.
Todd Sullivan 25:52
So then in the US, you have a situation where every state is a nation, right? So if you want to grow in Massachusetts, by growing Massachusetts, I have to sell to Massachusetts dispensaries who can only buy from Massachusetts producers and have to sell it in the state of Massachusetts, nothing goes across the border right now. So when people looking at the Kerala leafs, the true leaves in the US Jushi holdings, etc. They don’t have it’s not going up. Trium. Right. Well, they’re they’re they’re making massive amounts of Marlboro cigarettes in this production facility. They can produce, you know, 4 million cases a year of Marlboro cigarettes and ship it all over. They’re going to do in each state. Right. So there’s not a lot of economies of scale right now. The industry hasn’t so has traded on legalization news right now or the safe Banking Act, right? People are under the assumption that safe banking is going to be this panacea for the industry. Everything that’s going to loosen up capital is going to be readily available, and I got no sway and nothing could be farther from the truth. What will happen when safe banking passes is some of your regional banks are going to tiptoe into it. While you’re JP Morgan, your city, your big banks will not touch cannabis until it is federally legal, because they have too much risk. Otherwise, right? Bank of America’s headquarters is in Charlotte, right? They’re going to touch cannabis in Massachusetts, South Carolina could say get out of our state. Right? We don’t want you in our state if you’re touching cannabis, right. And that’s a huge problem for Bank of America. So I’ve spoken to people at the major banks and told that we will not touch it until it’s federally legal. Now these crudely schedule it that would in my opinion, have a bigger effect on the industry than the safe Banking Act. The safe Banking Act is nice. We can have some senators walk around and pat themselves on the back for doing that thing, which is what they’re really good at. It will it will have some effect in the margins. And it’s not going to unleash capital on the industry. The only thing that will unleash capital in industry is going to be legalization or D scheduling from a schedule one drug to a schedule two or lower right now the US government tells us that cannabis which kills nobody via overdose every single year, nobody who has never been recorded overdose got the cannabis and the reason is it doesn’t act on their brain and central nervous system like other drugs do. It doesn’t shut them down. It can’t. Okay. So the investment is you got to look long term. Okay. I think legalization happens with the next administration. You got a two year window. Okay. I think no matter who the next president is, they legalize cannabis. The next president is going to be a younger Democrat. Right? They’re going to be Hey, we got to do this. If you’re a Republican president, right. The largest voting bloc coming up right now are millennials and Gen Z. Top three priority for them is cannabis legalization. Your Republican president. You go in there and you legalize cannabis, you steal a top voting demographics key issue and make it your own. Right. It’s pragmatically and politically it’s the smartest thing you can do. And that idea that Sanders in the US public wants it 70% of the public wants cannabis legalized so there’s no political backlash to doing it right.
Todd Sullivan 29:06
So you’re gonna buy cannabis stocks, buy the large US based MSOs be prepared to hold them for a couple years if you’d like the MSOS ETF. There’s a YOLO ETF. Find the one and I haven’t done the research. I apologize. Find the one that has the most US based companies in it. You want to eliminate your Canadian companies as fast as possible from this equation because when it was legal in the US, money will pour into these companies like we have never seen in any industry at all. Right now. There are trillions of dollars because of the federal status to this plant that cannot invest in cannabis. I have people I know Wall Street who are dying to invest in privately held cannabis companies and can’t touch it. JP Morgan will not let investors in his prime brokerage buy legally traded cannabis stocks. So that the demand is out there. The ability to invest in it is restricted. When this turns legal, I’m telling you, we saw a glimpse of this when Biden won the election, right when Biden won the election November, by January, February buy, prices had skyrocketed for all cannabis stocks. And then about a month later became kind of obvious. Wait a minute, why are they talking about doing something in the summer? Right? So it’s actually got to climb back down. And then it was fall. And then they introduced a bullshit bill in the spring and summer that no one’s going to vote for and it just kept drifting lower. So when legalization hits a major MSOs in the US are gonna go crazy.
Nathaniel E. Baker 30:39
What does MSO stand for?
Todd Sullivan 30:41
multi state operators.
Nathaniel E. Baker 30:42
Oh, I see. Okay, sure. There was like Tilray
Todd Sullivan 30:46
Tilray. is Canadian. Trulieve out of Florida right do you guys want to look for US based ones truly is the big one in Florida. The one I have right now that I love. There’s two that I have right now but I love number one is a REIT: IIPR. Okay. It is the only publicly traded pure cannabis REIT on the market. They operated primarily in the medical side, they’re going into the adult use side now. We bought them on valueplays, we bought it in 20, I want to say 2019. They had about 11 properties. It was about 35 bucks a share. Now they’re at about 111 properties. Last I looked at around 100 bucks a share. We’re getting a 12% dividend yield right now the dividends grown so fast. The current dividend yields about a percent on this thing and it’s a rate and it’s kicking off cash left and right they just raise the dividend 20% year over year. So as a cash play, you know, my subscribers and we’re we’re getting 11% cash dividend every year on this sucker. I think this thing’s you know, as high as 285 Last year, I think I can easily clip that based on the fact that they are the only player in the market right now. That’s in that space. Another little company that I like, is called Glass House. They’re out of California. I own the warrants, GHBWF is the name of the warrants They’re dirt dirt cheap right now. They have a great management team. They are going to be probably the largest low cost producer in California legal cannabis. And they’ve acquired some really top shelf dispensaries. So when I look at them, I look at them as a Starbucks of dispensaries right they’re going to have premium flour. They’re going to control their supply with very low price cannabis. And they have very nice dispensaries with a not gonna have to compete competing on price. Right So Starbucks is never the cheapest copy anywhere. But people flocked the doors because of the product and the quality of the product they have. I think glass house is creating the same thing. Class offices the only plant touching Canada stock that I own right now. I bought the warrants I think just five years left on the warrants. In the next five years cannabis will be legal. And when it is legal, those warrants gonna be worth a lot a lot of money. So that’s how I’m playing. You look at cannabis right now. I look you got to look at least two years out. So looking in the next two years, all the oil is going to happen now in two years. The stocks are going up and down based on legalization rumors, but they’ll get filed, they’re gonna go up with nothing happens they’ll come back down. That’s that’s what’s going to happen in space right now.
Nathaniel E. Baker 33:24
Now, what about couldn’t you just buy like, you know, a cigarette company and to play the same trend? Because wouldn’t they be getting into this then if it does become legalized nationally, or decriminalized? Whatever
Todd Sullivan 33:37
They will get into it by purchasing.
Nathaniel E. Baker 33:39
Okay
Todd Sullivan 33:40
so what will happen? Let’s, let’s assume that’s legal, because right now, right now, in Massachusetts, you can’t you can’t combine alcohol and tobacco. You can’t combine alcohol and cannabis. Right. So state by state that may not be able to do and I’m not even sure on the federal level that they’re going to allow Philip Morris to own you know, called Trulieve cannabis. I don’t even know if that’s going to be allowed. And I’m not even sure they’re gonna let it alcohol mixed with cannabis. So that’s that’s not something that I would I wouldn’t bank in investment thesis on that I heard Altria is doing everything they can behind the scenes to position themselves to be part of that industry. But there’s no guarantee they’re going to be going to be allowed.
Nathaniel E. Baker 34:27
I see. And what politically? I mean, we’ve been hearing about legalization for a while. Yes, it’s much more supported now. Certainly not has been in a long time. But I mean, you know, the the Schumer’s in the hands of the pharma companies, but aren’t Republican lawmakers also, if not more, so. And I mean, just because there’s a Republican that comes in doesn’t necessarily mean that it would be a layup either way.
Todd Sullivan 34:55
Yeah. So politically let the last count I saw was there were on 11 Democrats that were not prepared to vote for any legalization bill, that was before Congress. So even you know that everyone wants to make it, you know, a purely political left versus right issue. But even the left can agree on how many they want. And there were Republican governors who were going to vote for. So I think the actual number of votes that Schumer needed was five or six, to pass up or to get the tie, he needed to be able to have Harris break the tie in the Senate. I don’t think he’s gotten there yet. Because the last bill they put forward as I think was worse than the first one, really. So what I think is going to happen, and a lot of it depends on what happens in the right in the midterm elections. Right? Sure. I’m guessing based on history, if history holds, Republicans should take the House and the Senate in the midterms. Right? Because anytime you have, anytime a party owns all three, they tend to lose something in the midterms. And when you add a recession or high inflation under that it’s even more pronounced. Right. So I’m assuming, you know, we the Republicans should pick up if they don’t take it, they should pick up seats on both right. And the Senate to tie so they should take control of the Senate, which effectively kills it for the next two years under Biden. Right. If that doesn’t happen, I’m not sure anything changes with by not to see Biden, you know, sort of as a walking up the door to yours, a gift to his Democratic colleagues legalizing it. If they still have control of the Senate in the house at that time. If they don’t he can you know, he got the schedule it without Congress, okay, which is not a legalization, but it’s a it does. It does open up a lot of doors, and he could do that. But makes it safe, he’s going to be done. I do firmly believe that there’s two reasons that Republicans would vote for it. And they came in to a number one, as I said before, it’s a it’s a purely democratic issue right now, by Republicans taking a lead and legalizing it. They could steal the one of the most important political issues from the left for the largest voting demographic coming up. They could go back to prime and say we legalize marijuana. A few Democrats didn’t do it. We did it. Number one. Number two, every single state that legalizes cannabis is a massive inflow of tax revenue, massive inflow tax revenue. It took it took Massachusetts two years to eclipse alcohol taxes with cannabis tax. And right now we’re 40% ahead of that. So we collect 75. At the end of last year, we collected $75 million in cannabis taxes, only 50 and alcohol, it took two years to get to that number. Okay, now, it’s the best tax or politician, it’s not a sales tax than income tax on a property tax. Right? It doesn’t affect the general population. If you don’t use it, you don’t pay it. So everyone loves those taxes, except the people who use it, but whatever, they don’t care, right. So it’s a user tax. So it’s it’s politicians look at that as free money. Right? So by legalizing at a national level, you’re going to increase tax revenue to all the municipalities, all the states at a time when they desperately need help with their own balance sheets and their own activities in their own state. And then you still you still have significant voting issue from a large demographic. Politically, it makes perfect sense, but it really depends on who’s in St. Paul Logan, right. Is it gonna be the Santas who by the way, has a great medical program in his state? Right now, they haven’t legalized adult use because it’s live it’s the lot of the licensing thing is tied up in lawsuits. Because you know, Florida,
Nathaniel E. Baker 38:37
Florida, Say no more. Yeah.
Todd Sullivan 38:40
So it’s tied up in lawsuits but they have a program. They have a robust MediCal program in Florida, the largest US MS) is headquartered in Florida. It’s Truleaf. so you know, it’s not like he’s from a state like Texas where if you’re caught with a, you know, a seed in your pocket you’re doing 10 to 15 years, if they allow cannabis in Florida, you can walk down the street of Miami and smoke a joint and the police can walk by it, they’re not going to bother you. Right. It is openly smoke. So if you go to South Beach, it’s everywhere. Right. So it’s not an issue. So if it’s the Santas I can see him also legalized because he’s very, he’s very politically opportune. Yeah. And he would take that opportunity. If it’s someone older than the Santas they bring this another retract like Biden was a democratic reach out of the pockets, bring someone back out of hiding to run for president. And that’s all bets off as far as what their actual look on it. If it’s someone younger than DeSantis. I think it’s a no brainer that legalized but it really comes down to age, you know, that, that 60 to 80 year old age is still in that it’s a gateway drug mindset
Nathaniel E. Baker 39:45
Reefer madness. Yeah. All right. Well, that aside? Yeah. I mean, wouldn’t it be it would also make sense for Biden, one would think, I mean, you could the tax windfall from this, you could fund all kinds of stuff. You would think as far as infrastructure Sure, where have you like?
Unknown Speaker 40:01
I don’t see. I mean, there’s no, there’s no practical reason for doing what he’s doing right. He campaigned on legalizing he campaigned on letting people out. He can play, he campaigned on competing access. He picked Kamala Harris because of her stance on him. Now, her stance was a flip flop because she was the she used to brag about being the incarcerated or in chief when she was the AG of California. But whatever she changed her mind, that’s great. That’s politics. He can pay that at all. His party is behind it, his voters are there’s no, there’s no pragmatic reason for him doing what he’s doing, oh, other than he has that 1950s mindset on the plant, and he’s not going to change his mind, no matter what happens. And they just said to me, he’s getting asked constantly now about it, and even the industry now, the initial game pass for the first year. But even some of the more left leaning people in the industry are like, Hey, you lied to our face, and I call him out on it. Now, you know, if he you know, Kamala Harris is talking to the Russians about Brittney Griner. who’s in prison over there for a halfpipe, right. There’s 40,000 people in the US still in prison that they could walk out with a stamp on the vendor, and they’re not doing it right. So the industry is like, we don’t really care. You’re on TV complaining on Brittney Griner. And when we get 40,000 US citizens a prison in our own country. But the same thing, she’s in jail for there. And it’s just right now they’re just as political opportunism on their part and, and the industry is starting to revolt and get sick of it. And as a hey, you promised, and you’ve lied. So I do think if they don’t seriously do something about let’s say for the midterms, it’ll be a dramatic, it’ll be a significant reason why they get their butt handed to him in the midterms. Because, you know, if you’re under 25 years old, and you voted for that, you feel like you really do.
Nathaniel E. Baker 41:49
I mean, I guess you could you could maybe argue that they don’t they it wasn’t just wasn’t a priority politically, and that maybe in the second half of a term, it will be, you know, he wanted to pass these infrastructure bills.
Todd Sullivan 42:00
That’s the argument they’re making. I mean, it’s not a priority right now. And yeah, industry is saying that, well, will you campaign on it? What have you said one of the first things we’ll do then the problem is, Biden and Harris ran so hard on it, to get those votes on those demographics that they promised on the world. And they haven’t delivered another what they’re saying now is the opposite of what they said that but it will happen it will happen in the next two to four years. So use that mindset when you’re investing by the US based companies don’t go into pink sheets and buy the Canadian pharmaceuticals because your buddy saw one of them that was trading at four cents got bought out for five bucks because 95% of those are going to zero you know, I mean just by the big entrenched US companies be patient wait when it flips legal you’re going to be well Well, I mean, you know stock that triples in a year you’ve held it for three years. That’s a great return right? You don’t send out something flat for a couple years because you don’t know when that leap of faith is my thing is when people ask me is like I don’t know when it’s going to happen but I know it’s gonna you know, if you want to wait to legalization or buy the stocks you will miss the majority of the run up you will miss the majority of the price gains and this is no different than buying oil a year ago, right. I don’t know when was gonna go up. I know it’s gonna eventually. I don’t know, what am I going to legalize? But I know we’re going to eventually when we do, it’s going to be spectacular.
Nathaniel E. Baker 43:28
Yeah. Okay. So we got a IIPR that was the REIT you mentioned. What’s what’s that Trulieve
Todd Sullivan 43:35
Trulieve is an MSO people who buy I don’t own Trulieve myself, but I think it’s I think it’s I don’t know, it’s on the Pink Sheets or on the pink sheet. So that’s okay. None, cannabis can’t be on the stock exchange, the NASDAQ or the Dow because the federally illegal makes sense. Yeah. So that also restricts right, there are a lot of funds that can’t buy pink sheet stocks. Right. So if you’re a mutual fund, or if you’re some family offices or pension funds, you can’t buy pink sheet stocks. So you can’t buy cannabis stocks, even though you may want to the Elvis class house brands out of California. Yeah, those those are dirt dirt cheap. I bought a boatload when it gets loaded by Samar. And I have my outlook on that as is two to five years. And I know in that timeframe, we’re gonna get legalization and when we do those warrants are going to be worth several several multiples of what they are now. I’m happy to sit back and wait for that.
Nathaniel E. Baker 44:28
Any international stocks that you’ve you’ve looked at in this because it’s legal and I swear, I guess the demographics don’t make sense. And that’s actually
Todd Sullivan 44:35
Actually no, no some there’s some pharmaceutical companies internationally, but I don’t I don’t have the skill set to figure out where you know, you have GW Pharmaceuticals. They got bought up by Sony I forget the name of it, but you know, they’re they’re in Great Britain and other pharmaceutical companies are in Europe, but it’s to me it’s, I don’t even invest in us pharmaceuticals guys just don’t have any skill set to say This drug versus drugs gonna make it the market first and have that kind of Yeah, that’s that’s a whole Yeah, it’s it’s yeah, you’re betting on this? Well, I think most people in investing in pharmaceuticals get lucky if they were there. Or they have a friend who knows, hey, this company’s dialysis machines getting picked up by already shipped by a kind of thing.
Nathaniel E. Baker 45:17
Yeah, I did at one point one of the better returning hedge funds several years ago was a BioPharm.
Todd Sullivan 45:23
Yeah.
Nathaniel E. Baker 45:24
And there’s there’s been a bunch of these that started with with, you know, some with former doctors and stuff and they felt like they could game it
Todd Sullivan 45:31
if you’re gonna invest in that you’d have to have a doctor or someone on your staff that you can talk to that understands what’s happening with these things that don’t like that. But I mean, hey, a pharmaceutical that is that they hit it. I mean, they hit it huge. They really do. I mean,
Nathaniel E. Baker 45:44
but even with the doctors, a lot of them didn’t work out
Todd Sullivan 45:46
Politics, you’re still playing politics with the short at that point, no matter what you do at the end of the game, and still politics with the FDA.
Nathaniel E. Baker 45:56
Yep. All right, Todd Sullivan. Thank you for this very interesting conversation. Maybe in closing, you can let our readers or readers or listeners know where they can find out more about you. And about value plays.com Other than valueplays.com. And I’ll put that in the shownotes as well.
Todd Sullivan 46:13
Yeah, I did a website valueplays.com. If anyone’s interested in private placements in the cannabis business and getting involved in cannabis companies at the ground floor before they go public. That website’s CannapreneurPartners.com Welcome to go there and my cell phone or email there. I’m happy to have any conversation. Anybody wants. Accredited investors only though, so
Nathaniel E. Baker 46:35
yeah, sure. Yeah. Very good. Awesome. Well, thank you. Thank you all for listening. And we look forward to speaking to you again next week.