August 31, 2024
Commentary
Introduction
During the month, investors witnessed strong equity performance from pharma and health-related names such as Eli Lilly (LLY) +19.6%, Costco (COST) + 8.6%, Walmart (WMT) + 12.8% (USD performance) while key US cannabis names exceeded analyst expectations but suffered from regulatory setbacks. We discuss an adjusted timeline with respect to major catalysts below while seeing positive signs in the Presidential elections as both parties seem to be supporting cannabis reforms. We continue to hold top ten weights in several US cannabis companies that produced solid Q2 results such as Green Thumb Industries (GTI), Trulieve Cannabis (TRUL), and Cresco Labs (CL). Our view is that given regulatory delays, it's best to hold those companies that regardless of regulatory changes, these names operate with scale across multiple states with leading market positions. Usually August is a quiet month, however, given the election cycle, it was an eventful week. In mid-August, the Drug Enforcement Administration (DEA) announced the need for administrative hearings on December 2nd before it could publish its Final Ruling on Re-scheduling cannabis to a schedule III drug. This announcement reduced enthusiasm for the sector, only to change direction at the beginning of September when Former President Trump announced support for the trifecta; Florida Ballot Initiative in support of adult use; Re-Scheduling cannabis to schedule III, in addition to support for SAFE Banking. We discuss all these issues and expect an eventful two months in US politics.
Ninepoint Cannabis & Alternative Health Fund - Compounded Returns¹ as of August 31, 2024 (Series F NPP5421) | Inception Date - August 4, 2017
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|
Fund |
-8.7% |
-2.2% |
-9.5% |
-14.6% |
-2.5% |
-18.6% |
-7.2% |
3.5% |
In early August, US cannabis investors had gone through the Public Consultation Period on Re-Scheduling Cannabis to a Schedule III drug with momentum supporting a pre-election positive decision. Comments from The Drug Enforcement Administration (DEA) remained on track to finalize the rescheduling of marijuana by October, according to an agency official. The public comment period ended July 22, with over 43,000 comments submitted. A DEA official was quoted stating “We’ve already analyzed tens of thousands of comments but do still have thousands remaining. At this pace, we are still on track for a final rescheduling announcement to come prior to October,” the official stated.
Important in this discussion is the result of a Schedule III announcement that would open the opportunity for medicines derived from cannabis to be prescribed nationwide. In addition, it would be the first major positive federal legislative change for cannabis in the US, opening the door to further reforms such as federal banking and other more common business practices. In addition, Schedule III implies that state-legal marijuana patients and businesses would be able to claim a range of federal benefits and protections. For businesses that means the elimination of onerous tax rates related to IRS Code 280E.
Despite the positive momentum from various stakeholders and the White House, and the overwhelming number of positive submissions from the Public Consultation Period, the DEA announced mid month that they have decided that further review is required and have established an administrative hearing on December 2nd to discuss re-scheduling thereby delaying a final ruling until after the November election.
Why the DEA Chose to Delay and What are the implications?
Since the beginning of the year when the Department of Health and Human Services (HHS) was forced to release its 250-page review of cannabis, there have been numerous calls for an administrative hearing to discuss the proposals, their impact on federal laws, implications on the medical system in addition to implications for law enforcement. There have been open letters (shared on social and traditional media) to the DEA from at least 18 Attorney Generals and 9 former DEA Administrators requesting hearings. It is important to note that from the beginning the DEA has stated that they had “requested additional data and more rigorous scientific analysis to determine whether cannabis should be appropriately placed into Schedule III.” The decision to delay the decision to December has caused a more subdued response on the part of investors as a delay post-election increases the chances that a Republican win in the White House could derail decision-making on re-scheduling indefinitely.
Former President Trump Steals Democrats Thunder on Cannabis
Early in September, cannabis stocks got a short-term injection of enthusiasm as Former President Trump announced he is considering voting Yes to the Florida Ballot initiative to legalize cannabis for adult use. “In Florida, like so many other States that have already given their approval, personal amounts of marijuana will be legalized for adults with Amendment 3.” The Former President stated his rationale based on his view that Florida voters in recent polls overwhelmingly support legalization and given that many other states have already done so, it is inconsistent to have laws that lead to incarceration based on state residency; with arbitrary obstacles preventing efficient business operations. His statements seemed to potentially be a personal shot against Florida Gov. Ron Desantis with whom Trump has had a falling out. Interesting to note that prior to his announcement Trump had meetings with various cannabis operators in Florida including the CEO of Trulieve Cannabis (TRUL) Kim Rivers of Florida who runs the largest cannabis company in FL. Immediate impact saw a new energy in Florida focussed cannabis companies such as TRUL, Verano (VRNO), Cresco (CL) and Curaleaf (CURA), among others.
A week later the Former President went on to steal federal cannabis support away from his Presidential rival again leading to a significant positive run in cannabis stocks.
Sunday, Sept 8th, Trump announced on his “Truth Social” social media platform that he supports federal cannabis reforms and state-legal marijuana businesses. He was quoted as saying “I believe it is time to end needless arrests and incarcerations of adults for small amounts of marijuana for personal use… Whether people like it or not, this will happen through the approval of the Voters, so it should be done correctly.” Among the key points supporting cannabis reforms, Trump stated his view that.
-He will vote YES for the Florida adult use Amendment #3
-Cannabis should be moved to Schedule III with a “focus on research”
-Work with Congress on laws for states’ rights to pass cannabis reform laws
-Create safer banking laws that help cannabis related businesses
The points suggest Trump is embracing reform like that of Republican Representative Nancy Mace’s STATES Reform Act, that at its core decriminalizes cannabis at the federal level while allowing regulation of the industry at the state level, like the way alcohol is produced and distributed.
What the equity market is embracing in the recent election pronouncements from the former President is his support for the three major catalysts for US cannabis stocks: Re-Scheduling, the Florida Ballot Initiative and Federal Reforms. To some analysts and cannabis industry observers, Trump seems to have stolen the marijuana issue from the Democrats. Despite nearly four years in power and multiple pronouncements regarding cannabis, Democrats have not been successful in pushing virtually any broad-based cannabis related reforms forward. VP Harris talked about Re-Scheduling as the VP in February, but since becoming the Democratic nominee for President has not made any statement on the extent of her support for cannabis.
Overall, the comments from Trump should help mitigate election related concerns around delays in re-scheduling and related federal reforms. It also re-emphasizes our focus on the top-tier US cannabis companies that have a combination of strong balance sheets, operating leverage and higher margins. Q2-24 earnings results from early August support our view with TRUL generating a beat on revenue growth, gross margins and Adj EBITDA, while Green Thumb Industries (GTI) also delivered strong margins and sales above estimates. Better margins and better balance sheets provide better access to capital for future growth.
Delta-8 Intoxicants; Hemp, The Farm Bill & Interstate Commerce
Much has been written lately about the evolving market for Delta-8 intoxicants in the US, increasingly found in beverages and gummies. Concerns arise as national surveys in the US show an increasing number of high school students, approx. 11% used delta-8 THC in the past year. Delta-8 comes from the extraction of hemp plants, a genetic cousin to the cannabis plant. Delta-8 began to be marketed after the 2018 Farm Bill legalized the sale of hemp-derived products, containing less than 0.3% of delta-9 THC. The concept at the time was that such a low level of THC would not provide the psychoactive effect associated with the substance, thereby allowing interstate commerce in delta -8 products. However, by making Hemp, and the substances extracted or derived from it legal, the Farm Bill inadvertently opened a loophole, allowing products with clearly intoxicating effects to be sold legally across the U.S. Now the challenge is the lack of regulatory oversight relative to the oversight and testing of state-legal cannabis, that results in unregulated markets with higher potency in beverages and gummies. From a regulatory point of view, there are 19 states with no regulations around hemp derived delta-8 while 15 states have banned delta-8 products due to excessive psychoactive ingredients.
Recently, companies such as Curaleaf (CURA) and Canopy Growth (WEED) subsidiary Wana sell intoxicating hemp-derived gummies and drinks, joining a longer list of brands such as happi, CANN, MXXN, and Martha Stewart CBD products. Currently, discrepancy in the interpretation of the Farm Bill allows some early participants to gain market advantage however we would caution investors to consider the loophole inadvertently created in the Farm Bill and the likelihood that regulators close those loopholes to be within a regulatory environment more on par with the regulated cannabis industry.
Option Strategy
Since the inception of the option writing program in September 2018, the Fund has generated significant income from options premium of approximately $5.02 million. We will continue to utilize our options program to look for attractive opportunities given the above average volatility in the sector as we strongly believe that option writing can continue to add incremental value going forward.
During the month we used our options strategy to assist in rebalancing the portfolio in favor of names we prefer while generating approximately $21,000 in options income. We continue to write short dated covered calls on names we feel are range bound near term and from which we could receive above average premiums which included UnitedHealth Group (UNH). We also continue to write short dated cash secured puts out of the money at strike prices that offered opportunities to increase our exposure, at more attractive prices, to names already in the Fund including McKesson Corp. (MCK) and Pfizer (PFE).
The Ninepoint Cannabis & Alternative Health Fund, launched in March of 2017 is Canada’s first actively managed mutual fund with a focus on the cannabis sector and remains open to new investors, available for purchase daily.
Charles Taerk & Douglas Waterson
The Portfolio Team
Faircourt Asset Management
Sub-Advisor to the Ninepoint Alternative Health Fund
Statistical Analysis
Fund |
|
|---|---|
Cumulative Returns |
27.6% |
Standard Deviation |
27.6% |
Sharpe Ratio |
0.00 |