Alternative Health Fund Market View

September 13, 2021

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We have received the question “should we be buying US cannabis names?”

Our view is US Cannabis names are significantly under-valued or over-sold. We don’t just throw out terms such as “under-valued” or “over-sold” without backing it up. Below we have provided the Q2-20 and Q3-20 financial highlights for the leading US MSO’s as well as the forecasts that were provided pre-election compared to current forecasts.

What we see is that the names noted have executed well, actually having outperformed analyst estimates. The companies are proving out what were pre-election aspirational forecasts and now estimates have remained the same or gone higher meaning these forecasts are actually achievable. Therefore not only do we think 2022 forecasts to be achievable but valuations have become even more attractive.

Comparison of Financial Results & Forecasts 2020-2021:

What is also intriguing is that not only have the companies executed well, but the market in which they operate has grown considerably. See the chart below which illustrates the equity performance of the largest US MSO’s from October 2020, prior to the Green Wave when five states successfully passed ballot initiatives transitioning their states to legal adult use cannabis states. The chart shows that despite the superior execution, the stocks are only 10-15% away from their Pre US election prices. Yet the companies above have all outperformed their forecasts, and have generated EBITDA growth higher than most other industry groups.

Lets also consider what has happened since the election Nov 2020? We have seen the number of States that are legal for REC add AZ, MN, SD, NY, NJ, VA, CT, NM, ND to the list of now 19 states that are fully legal, representing 148 million or approx. 41% of the US population. That results in a significantly greater TAM (total addressable market) than was presented one year ago. To us, this is a generational opportunity to create wealth.

Top 5 US MSO’s

Source: Refinitiv

US MSOS ETF


Source: MarketWatch

The other question many investors have right now is “why are the stocks this cheap”? We think it’s a simple answer. The run-up since the US election was fueled by retail and fast money buyers who were expecting quick legislative action. This clearly did not happen in the timeframe expected and these investors moved out of the sector. With pools of institutional capital still prevented or unwilling to invest in the sector due to with risk and compliance concerns with respect to marijuana related businesses, the marginal (new) buyer is not in the market right now. Slowly that is changing.

 

Charles Taerk & Douglas Waterson

The Portfolio Team
Faircourt Asset Management
Sub-Advisor to the Ninepoint Alternative Health Fund

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: commodity risk; concentration risk; credit risk; currency risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; interest rate risk; liquidity risk; market risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; small capitalization natural resource company risk; small company risk; tax risk.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

 

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