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Outsider Club Founder Nick Hodge on What to Look for in Three Emerging Megatrends: Cannabis, Cryptocurrency and the Electrification of Everything

March 22, 2018

Gerardo Del Real: This is Gerardo Del Real with Small Cap Stock Digest. Joining me today is the Founder and President of the Outsider Club, Investment Director of Wall Street Underground Profits, Early Advantage, and the wildly successful and pioneering Nick's Notebook, which has raised tens of millions of dollars for both private and public companies. Nick, thank you so much for joining me today.

Nick Hodge: Gerardo, it's fantastic to be here. Thanks for having me.

Gerardo Del Real: Wonderful. Now, listen, I provided a brief introduction. Can you share a bit more about the Outsider Club philosophy?

Nick Hodge: Yeah, sure. Outsider Club is a free daily E-Letter. It's a financial newsletter geared towards retail investor folks. By that, I mean folks who are looking to manage their own money and make their own investment decisions and do that really from soup to nuts. I'm talking about looking at blue chip stocks, at dividend paying stocks and retirement plans, all the way to speculative investments and trades in sectors that aren't as looked at by the mainstream.

We definitely have a contrarian bent. We've been around since 2013, coming out of the last financial crisis. I saw a real need for this, a need for third-party research and analysis, and a need for opinions that were contrarian and went against the grain of the mainstream Wall Street sentiment.

We've had a lot of success with that tact over the past several years I'd say, from resources to cannabis and other bull markets that are forming. That's Outsider Club in a nutshell. It comes to you every day, and if you like what we have to say in the free newsletter, there's a bunch of paid products and newsletter services that you can purchase based on your investment philosophy and tolerance for risk.

Gerardo Del Real: Can you share with us how long Outsider Club has been in the newsletter space arena, and just generally out there as far as your approach, that contrarian bent? Because you're really good at getting ahead of trends and making, frankly, subscribers and people that follow you a lot of money by getting in early on things. How long has Outsider Club been around?

Nick Hodge: It's been around in earnest since 2013 and I think it found its genesis in the housing crash and financial crash that we saw in 2007. And I'll share a personal story that led me to found it. And that is at the time, 10 years ago, I was a clean tech analyst covering solar and wind stocks, and that was a great place to be, because those stocks were going up 5 and 10% seemingly on a daily basis. When you would look at the Wall Street Journal spreadsheets of stocks with the highest value, they were all stocks like Chinese solar companies like JA Solar and things like that. That was really fun and I thought I was really smart but then 2007 and 2008 happened, and I found out that, as many people do in a bull market, that you're not so smart and those gains can evaporate quickly.

I gravitated naturally after that towards hard assets and sound money policy. And I think that's where the Outsider Club is grounded in those lessons I learned as a young 20-something kid going through a financial crash like that, as an introduction to the market. I hope that lesson I learned is something that can stick with me for the rest of my career and help lots of other folks as well.

Gerardo Del Real: Now I've heard you say that you're sector agnostic and a generalist. I've described you as an expert in everything that you take an interest in. Are there sectors that you're paying extra attention to right now, Nick?

Nick Hodge: Yeah, there's always a bull market somewhere right, Gerardo? I realize that there's actually a bull market everywhere right now. I mean, if you look at the broader markets since 2009, they're up something like 300% and change. That's historically disproportionate. You typically don't get equity bull markets like that, and such broad-based rises where literally the indices are making records every day.

Now I'm taking a step back from that and saying, Okay look, we've got an S&P that's trading at ridiculously high PE valuations and we've got a Dow that's not really representative of everything that's going in the market, given the way it's weighted. I start looking around for things that I think are going to be needed, things that are going to become megatrends and companies that are going to support those megatrends.

When we have a bull market like we've had for the past four, five, six, seven years, I think you have to start to take a bottom's up approach, and look at sectors individually and companies individually, and see what they have to offer as far as upside, and try to find the ones that are relatively undervalued compared to the rest of the market. I think one of the sectors that you and I both agree that fits this criteria is the resource bull market. I mean, commodities relative to stocks are the cheapest they've ever been, historically, and we're starting to see a bull market form in the base metals that will likely translate into the precious metals, so I think that's one factor you have to look at.

But there's a lot of megatrends out there that are deserving of investors’ attention. Cannabis is clearly one of them. That's just a really nascent market. Only a handful of states are legalized recreationally. Canada hasn't implemented its full countrywide legalization yet, and so as many people have billed that market, it's the end of the second prohibition, and I think that market's going to have legs for a long, long time.

Another megatrend that's worthy of looking at, it could be electrification of everything. You've got the Consumer Electronics Show going on in Vegas right around this time. All the devices that you see profiled there, they're internet connected, they're talking to each other, they're learning our habits, and that requires a lot of software, it requires a lot of data management, it requires a lot of programming, and it requires a lot of fiber optics. I think the electrification is one place to take a look, whether that's on a technology and software side, or whether that's on the resource side in the building blocks that are going to form that industry. Things like nickel for batteries, and copper, some of the main players that people know about, but also some of the more rare or less discussed resources. Things like cobalt and graphite and vanadium and various elements. All of these things are in limited supply and they come from concentrated places that aren't necessarily friendly or have first world ethics, so I think you'll see a lot more going on with that in the coming years.

Just to make it a nice number, I'll give you a third one, and that is cryptocurrencies. As you say, I'm sector agnostic, and I've tried to stay relatively agnostic about cryptocurrencies. I haven't yet been able to pinpoint the value of the currencies themselves, given that they're able to be created out of literally nothing and sold. But I do see the technology in the blockchain and in the software that keeps track of the ledger and helps people do transactions in a transparent way. I'll be looking to that sector for opportunities. I think there'll be some companies formed in the coming months, some IPOs that are going to be leveraging blockchain technology and ledger technology for the greater good and for a more libertarian financial system. That's a sector I'm happy to pay attention to. Let's not bet on the currencies themselves with my own dollars just yet.

Gerardo Del Real: That was well said, by the way. With your finger on the pulse across so many sectors, are there steps in your due diligence process that are a priority, regardless of sector?

Nick Hodge: It's the things we always talk about. Sometimes I think I can sound like a broken record when I talk about this, but people are always number one. You have to at least know the people and if you don't know the people you have to know of them and the deals they've done in the past. Make sure they're, first and foremost, quality stewards of your capital, they're doing what's in the best interest of the company shareholders, but also that they have the expertise to do what they say they're going to do in the sector they're operating in.

That stays the same across the board. Access to funding stays the same across the board. You have to make sure companies have a cheap cost of capital, they're able to tap the markets at reasonable prices to raise money, to execute their plan. Whether that's having a strong capital markets presence or strategic investors that can help them finance their way towards growth, and along with raising money, comes share structure.

That's something that always stays the same. The share structure has to be sound and intact, because if you let the share structure get away from you in various ways, either by having too much out there or having it not registered and not sitting in the right places with the right shareholders, then really everything that comes after that is, I don't want to say doomed to fail, but it's much harder to execute if you don't keep that share structure intact. Those are things that definitely stay the same across the board.

Gerardo Del Real: Excellent, excellent. I'd be doing listeners and readers a disservice if I didn't ask you to share some top picks in the small cap space. You mentioned cannabis stocks, you mentioned cryptocurrencies, you mentioned the resource space. Are there companies in each of those that you feel are above and beyond worth the allocation of capital in those companies, that you feel have a lot of legroom?

Nick Hodge: There are several and it's still really early days so it's going to be interesting to see how some of these companies materialize, but there's big companies in the cannabis space that are already taking a big lead. Companies like Emblem Corp. (TSX-V: EMC), for example. There's a private company you may want to put on your radar called The Green Organic Dutchman that just executed a big financing with a major Canadian producer.

So, while it's still early days, I would look to the Canadian companies in the cannabis space first of all, because at the end of the day, the cannabis is still illegal federally in the United States and business is still kind of tough to do. So if you can get in bed and do some due diligence on some Canadian companies that have exposure to the US markets, or have a path to exposure to the US markets, then I think that's a good place to be.

In the crypto space, it's still kind of early. I would look at companies that are mining coins with cheap costs. Just as you would in the resource space. You want to look for how much it costs them to mine these coins, and the big input cost in the crypto space is the electricity cost. I now live in Washington State and I was reading an article yesterday that said a town here called Wenatchee is becoming one of the crypto mining Meccas of the United States, and the reason is twofold.

One is because it's cold there, it's in the middle of the Cascade mountains, so they can keep their servers and data centers cool, and the other reason is because of cheap power. Washington State has a ton of hydroelectric power, and in Wenatchee I was reading that it cost two cents a kilowatt hour, which is much less than the national average. I know I'm evading the question of giving you a pick, but what I'm telling you is to look at these fundamentals and the input cost of Bitcoin miners when doing your diligence.

Then, we talked about the electrification of everything. I have a real picks and shovels play for that. It's a company called Lite Access (TSX-V: LTE). And what they've been able to do is they've been able to patent a way to lay fiber optic cable. And so instead of digging up a wide trench and disrupting infrastructure and disrupting traffic, they have a proprietary way to trench a narrow trench, just a couple of inches wide, then they put a conduit in there and blow the fiber optic cable through it. This is quite important because the world is going fiber in a big way for this Internet of Things transformation that I alluded to earlier.

This company really is at the forefront of connected homes, especially the last mile of installation. They've already contracted with some big firms in the UK, companies you'll know like British Telecom and Virgin Media. They're already laying for them, and it's come to a point now where they're laying so much faster and so much cleaner than their competition, that they're becoming the de facto installer. And I don’t look for that trend to slow down anytime soon.

If I could just go on for one more second, I'd like to tell you something to look for when you're looking at small cap stocks not in the resource space, as opposed to the resource space. I think one important differentiator there is you need to look for companies that are dominating their niche. I look at a lot of slide decks and I look at a lot of companies, and one thing that I try to steer away from is companies that tell me they're going to capture a part of a larger market.

They'll say, "Oh"– and I'm just going to make this up – "the antibody market is poised to a be a $2 billion dollar market and if we can capture just 5% of that, then that makes us an X million dollar company." For me, I'm looking for companies more that have a niche that they've encircled inside of that industry and they have a direct path to capture some percentage of that, not just telling me that this industry is being big and we're going to get a piece of it and that's why you should invest.

I want to know what your niche is and as Warren Buffett would say, "I want to know what your moats are around that niche, that the competition isn't going to come in and swallow you up.” Because it's not like the resource space where you can find another deposit and make a discovery in the small cap space across sectors. You've got to protect your product, have intellectual property, and have moats so that your product doesn’t become defunct or obsolete.

Gerardo Del Real: Excellent. Nick, it's been insightful as always. You know, I recently read a report that you put out on the craft liquor market. Could you just give me a quick, brief summary of your thoughts there? Because that seemed like a trend. Me being here in Austin, based out of Austin, craft beer is obviously something that's a dominant presence in weekday and weekend life, but I'd love your thoughts on that side of the business, and just what you're looking at there.

Nick Hodge: Yeah, it goes back to that bottom's up approach. When you look at broad-based equities that are trading at 50 to 100 times PE ratios, you start to scratch your head and say, “Hmm, what can I find here that's undervalued? What's going to be the next big trend?” I started thinking about craft brewing. I'm a big beer guy myself, and I know over the past I'd call a decade or so, beer has really come on in a strong way.

It used to be just Budweiser and Coors and Miller Lite, but now I think most people would recognize that when they either go to a restaurant or go to a liquor store that they're seeing large amounts of shelf space and menu space dedicated to what's call craft beers. There's been an explosion in the craft beer market over the past couple of years, starting with companies like Sam Adams and trickling down to companies like Ballast Point that were started out of a bar in San Diego and ended up being acquired for a billion dollars by big companies like Constellation Brands, who is the seller of Corona in the United States.

I think that trend is now giving way to the craft distilling trend. I mean, by that, spirits. Bourbons and whiskeys and gins and vodkas. They're starting to follow the same trajectory as that craft beer space, and no one is really paying attention to this. If you're looking for a big trend to be invested in that's contrarian and hasn't attracted a lot of investors yet, I think the craft distilling space is a good space to be. Especially because there aren't many equities to invest in, and so if you can find good ones early, I think it's going to be an incredible wave to ride.

Gerardo Del Real: Do you have a pick in that sector?

Nick Hodge: Yeah. I could tell you about a company called Eastside Distilling (OTC: EAST). It's a small little company, sub-$20 million dollar market cap, out of Portland, Oregon. But they've been able to come on the scene in a big way. They have their own line of whiskeys and gins and vodkas, of course, but I think what's really going to propel them is the agreement they signed recently with John Rich, who is a platinum level country recording artist, half of the duo of Big & Rich.

He's got his own brand called Redneck Riviera. He's got a Redneck Riviera bar in Nashville, he's got a Redneck Riviera bar in Las Vegas, and he's got a series of apparel and foods that he sells with the Redneck Riviera brand. He's now come onboard with Eastside and signed an exclusive licensing deal to sell Redneck Riviera, which Eastside Distilling has custom blended for John Rich.

So now, although Big & Rich is on the road, and this is already happening, when he performs concerts in front of tens of thousands of people, he's going to be mentioning Redneck Riviera. He's going to be taking shots on stage of Redneck Riviera whiskey, and really selling and promoting the brand in a guerrilla marketing style. There's already been some kickoff parties to that effect. He had a birthday party in Nashville just a couple of weeks ago where he had some major country music stars perform and had some people from the local Tennessee whiskey businesses at the party.

That generated a lot of interest. The next day, in fact the next two days, they signed distribution agreements that cover nearly 100% of the state of Tennessee to distribute their Redneck Riviera whiskey, and a wider roll out in the Southeast is going to come before going nationwide. If that's a trend that resonates with you, if that's something that's easy to see, as I think it is, then Eastside Distilling is probably a company you should take a look at.

Gerardo Del Real: Nick, it's been fun and insightful as always. You told us what to look for, what to avoid, and I think you gave us some excellent picks. I want to thank you so much for your time. Nick Hodge, everybody.

Nick Hodge: Thanks, Gerardo. I appreciate it.

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