Oct 17, 2018
Charles Taerk's Top Picks: Oct. 17, 2018
Charles Taerk, president and CEO of Faircourt Asset Management and sub-advisor to the Ninepoint Alternative Health Fund
Focus: Cannabis and alternative health stocks
MARKET OUTLOOK
The 10-year equity bull market has been extended by U.S. tax cuts and protectionist trade policies, which in the short term is going to keep the U.S. dollar strong, while U.S. employment will remain stable and consumption continues to improve. Down the road, however, that combination turns into inflationary pressure along with global economic dislocation and a slowdown caused by inflation and protectionism. Still, for the near term, we see continued U.S. strength.
Canada’s economy is not as clear. GDP growth has been the strongest of the G7 largely because of a previous weakened economic situation. National economic policy isn’t as focused on growth as south of the border. That combined with the challenges ahead with changes to NAFTA and the new USMCA could increase uncertainty and weakness related to trade. The situation in the west is challenging, as the country has trapped oil supply that combined with high personal marginal tax rates causes a potential slowdown in consumption throughout the country. Our concern is our competitiveness, so overall we are more weighted to American versus Canadian equities.
In terms of alternative health, which is the underlying theme for our fund, we see continued strength as an aging population and growing interest in health and wellness products drives the sector further into the mainstream. In our view, this theme encompasses everything from organics, nutaceuticals, natural health products, pharma, healthier choice food solutions, services for an aging population and alternative medicines like cannabis.
With respect to the cannabis sector, we see continued improvement in financial strength of the leading cannabis producers in Canada. As the recreational market begins and as global markets continue to grow for medical products, we will see improved earnings from the major players. With the regulatory market changing around the world, we see more countries enacting some form of legalization which allows for increased export of medical cannabis dosage formats. The global medical market for cannabis will continue to grow; that’s in our opinion what’s really driving the valuations in this sector.
As people continue to look for alternative health and wellness solutions, which includes new cannabis medication, the drive towards being proactive with one’s health will continue to spark innovation and new product delivery solutions. We see that playing out in the cannabis sector both in the medical side as well as the health and wellness sides. We see cannabis being a disruptive ingredient in the beverage industry, both the alcohol replacement industry and the nutritional drink industry. In addition, there will be disruption to cosmetics, health and beauty aids, edibles and medicines. Currently, the addressable market is 1.2 billion people in approximately 40 countries and that number will continue to grow as countries continue to de-schedule, de-criminalize and legalize for medical purposes.
TOP PICKS
CANNTRUST (TRST.TO)
Last purchase at $8.25.
The stock has been quietly performing. It doesn’t receive the hype of some of the other cannabis names, but is well positioned in Canada. With a high percentage of oil sales at over 60 per cent of sales, it continues to gain 38 per cent of all new medical patients in Canada and it has respected medical brands. The issue has been that the market hasn’t been impressed with their efforts to develop their recreational strategy. We see a number of catalysts on the horizon, including a U.S. listing, a strategic partner or investor, and continued global distribution.
ORGANIGRAM (OGI.V)
Last purchase at $7.16.
Organigram has a high-quality product with a low cost, particularly for an indoor producer (the most recent quarter came in at $0.80 per gram). It’s got solid management, well represented in supply contracts (in seven provinces, so it has punched well above its weight) and its recreational branding looks strong with The Edison Cannabis Co. Yet it’s underappreciated: current production capacity is among top 5 in Canada, but its valuation is a significant discount versus peers. There’s potential upside from the possibility of a U.S. listing, takeout optionality, a valuation discount, global potential and now it’s also early into biofermentation, which could lead to significant operating cost advantages down the road.
APHRIA (APH.TO)
Last purchase at $12.16.
Aphria is the cheapest of the big 3 (the other two being Canopy and Aurora) and top 5 in current cultivation. It’s also among the lowest-cost producers at $0.95 per gram and had a string of 10 consecutive quarters of positive cash flow. It has no strategic partner, though rumours abound about Diageo or Altria and others.
CEO Vic Neufeld came from Jamieson Wellness, so he has great experience in pharmacy. Jakob Ripshtein, a former exec at Diageo, is also Aphria’s chief commercial officer. Plus, the company has deep roots in agriculture, with its co-founders Cole Cacciavillani and John Cervini.
Leamington has good labour force and Aphria will be operating at 1 million square feet within the next quarter, making it one of the largest producers in Canada. Near-term events, such as supply chain constraints (duty stamps) might be impacting current quarter earnings and could weigh on the stock, but we see significant upside potential. There’s potential upside from strategic investments and partnerships, a U.S. listing and bringing additional capacity online by early 2019. All should serve to narrow the valuation discount.
DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
---|---|---|---|
TRST | N | N | Y |
OGI | N | N | Y |
APH | N | N | Y |
FUND PROFILE
Ninepoint Alternative Health Fund
Performance as of: Sep. 30, 2018
- 1 month: 12.33% fund, 6.27% index
- 1 year: 108.4% fund, 77.31% index
Index: Thomson Reuters Blended Health Care Index. The index is 70% Thomson Reuters Canada Health Care Total Return Index and 30% Thomson Reuters United States Healthcare Total Return Index. It’s computed by Ninepoint Partners LP based on publicly available index information.
Returns are net of fees.
TOP 5 HOLDINGS AND WEIGHTINGS
- Aphria Inc: 7.32%
- Organigram Holdings Inc: 5.25%
- CannTrust Holdings Inc: 4.64%
- Canopy Growth Corp: 4.03%
- Hexo Corp: 3.54%
WEBSITE: https://www.ninepoint.com/funds/ninepoint-alternative-health-fund/
LINKEDIN: Charles Taerk