VIDEO: UIT Fund Manager Charles Taerk on CannTrust Holdings Inc, Cronos Group, and MedReleaf Corp
Faircourt Asset Management has Canada’s first cannabis-focused mutual fund is big on CannTrust Holdings Inc (TSE:TRST) (OTCMKTS:CNTTF) (FRA:C9S), Cronos Group (NASDAQ:CRON) (CVE:CRON) (FRA:7CI), and MedReleaf Corp (TSE: LEAF) (OTCMKTS: MEDFF) (FRA:MEW).. The fund has lightened its exposure to cannabis companies recently, but at the same time have focused in on the companies he likes the best. CEO Charles Taerk breaks down why.
James West: Charles, thanks for coming in today.
Charles Taerk: Thanks very much, James.
James West: Charles, you recently – or rather, your partner Doug, who’s a co-manager of the fund – was featured in a Bloomberg piece today where they indicated that the fund was lightening up on cannabis names, and I know that Faircourt fund is not entirely cannabis. Why don’t we start with an overview of what the fund is, how it works, and then let’s lead into why are you lightening up.
Charles Taerk: Sure. So UIT Alternative Health Fund was launched in March of 2017, and it’s Canada’s first actively managed mutual fund that focuses in the cannabis space. But it’s not just cannabis; we call it alternative health because it really encompasses a demographic change in society where people are less reliant, and wanting to be less reliant, on traditional medicine, and they’re looking for healthy lifestyle choices.
So whether that’s organics, vitamins, minerals, supplements, whether it’s protein shakes, whether it’s meatless proteins, as well as cannabis, they all represent that same demographic shift. And so that’s what our fund is all about. We have a goal of being 50 percent weighted in the cannabis space.
James West: Okay. So you’ve got a few names that you like, and a few names that you’re lightening up on, obviously, in the face of weakness in the space? Is that a reflection of a perception on your part of the valuation of the space as a whole?
Charles Taerk: Well, look. The last six months we’ve seen a great run in many of the names. We also know that when the markets generally get more volatile, over the last two-three months we’ve seen increased trade wars and tensions with inflation and interest rates, and I think the cannabis sector is not immune, much like tech or pharma or any of the other sectors where we’ve seen a sell-off.
James West: Right.
Charles Taerk: We’ve taken some profit in some of our names, but that’s been over the last month and a half; we saw some of it coming, and my partner Doug is great at looking both at the technical as well as some of the fundamentals, knowing when to take some profit, holding some cash back, and now waiting for that rainy day.
This past week, we’ve now been edging back into some of our names that we really like, and feel that this is an opportunity to pick up some of those names at what we believe are pretty good bargains.
James West: Sure, okay. And so you’ve also, you’re now in a position to discuss one-year performance. So tell me about the year: how was your performance?
Charles Taerk: Thanks. Our year was great. We’re very excited about it, being the first fund. We’re still the only fund that’s been able to print a one-year number. Our one-year return is over 35 percent, and that is to March 31st.
James West: Wow.
Charles Taerk: And even what we are really gratified about is that there’s been a lot of talk about volatility and downside in the sector – the fund, over the first quarter of this year, is only down about 4 percent, when I believe the, whether you look at the other active managers or ETFs or indexes in the cannabis space, they’re all down 25, 30 or more percent.
So we’re very, very happy that we’re really maintaining a strong downside projection for our investors.
James West: Sure. And I guess that’s part of the rationale behind the fund being 50 percent cannabis and 50 percent other alternative health names, is that you’re not going to be entirely exposed to the volatility in either sector, per se.
Charles Taerk: Correct.
James West: Okay. So in the future, I mean, going forward into 2018, we’ve already seen in the media that everybody’s more or less now holding their breath, expecting a delay in the onset of recreational legislation. More than anything, I think that’s had a negative impact on the valuation of the sector. Is there – but then there is also Barron’s, for example, on, I believe it was March 30th, published a piece called Canadian Cannabis Stocks are Too High, and then it laid out a case where it pulled together some, you know, some creative, let’s call them, comparables and completely overlooked the potential, for example, that Canada is clearly going to be the dominant player in the global export market, which by all accounts is going to be somewhere between $150 billion and $180 billion by the end of 2020.
Charles Taerk: Exactly, yeah.
James West: So discounting that – but do you think that there’s a general sentiment among cannabis investors where there’s perhaps a bit of fatigue, coupled with the negative sort of sentiment implied by the delay in recreational rules, that is causing a general valuation? Or is it also the fact that we have chief executive president buffoon himself, you know, causing trade war rumblings and issues and essentially imparting uncertainty to the global market? Is it one, the other, a combination of both? What do you see?
Charles Taerk: Yeah, I think it’s a combination of both. I was involved in that Bloomberg article that you mentioned this morning as well, and one of the points that I made was, from a macro perspective, we are in the middle of a trade war. So it’s going to affect equity investors’ appetite to take risk.
James West: Donald Trump says we’re not in a trade war.
Charles Taerk: Right, we lost it years ago.
James West: That’s right!
Charles Taerk: But so, when you get the leader of the free world making a statement like that, people do hang back. And it was interesting: I did note that in the first quarter, there was more fund flows into fixed income investment funds than there were in the equities. So that’s kind of a global marker on where risk sentiment is. I don’t think the cannabis sector is any different from any other equities sector.
In terms of the Barron’s article, to us, it didn’t say anything that hadn’t been said before. I think the point about the Barron’s article and what they’re looking at or not looking at, I think you’re absolutely right; as Canadians, we focus on the 35 or 36 million people here, we look at the domestic market, we look at the amount of supply that’s being readied for us. We don’t really have an appreciation for how much is going to Germany, how much is going to South America, how much is going to Australia, etcetera, etcetera, and the list continues.
Our most recent monthly update to investors talked about a couple of the companies that have new arrangements in Europe. And when you just look at Germany alone – Germany has close to 90 million people, and there are thousands of pharmacies. Shoppers Drug Mart services Canada, has 1300 pharmacy locations for the entire country. And in Germany, I’ve seen each of the four or five Canadian LPs that are distributing each have the opportunity to distribute into pharmacy chains that each have over 1,000 stores.
So the magnitude of the growth in the global market, I think, is discounted incredibly by a lot of the North American media.
James West: Right. So now we’re going to talk a bit about some of your favourite companies in the portfolio.
Charles Taerk: Sure.
James West: Who’s a favourite?
Charles Taerk: Well, our favourite is CannTrust.
James West: CannTrust? Okay. We’ve been there.
Charles Taerk: Yeah? Two facilities, started out just north of the city and then recently moved down to Niagara with a greenhouse that’s being converted right now. What they’ve done already, expanded, they’re going to have 400,000-plus of grow room out in Niagara. And what really impresses us about CannTrust, whether it’s at their original facility or at the new facility, is the management, the controls, the operations in general, are really tight button-down. Symbolic of that is, they have the land-speed record, basically, of getting their Health Canada approvals. Took them two months to get the cultivation license for the new Fenwick, Ontario facility, and then only another two months after that before they were able to get the sales license for that facility.
That’s really impressive, because Health Canada is running around now, there’s over 90 licenses in existence; a year ago it was only 30-some-odd. So Health Canada representatives have been racing around the country helping people get registered; here’s CannTrust moving forward at breakneck speed. So we give Brad Rogers a lot of credit, the CEO. I know he’s been on with you before. They do a great job of focusing their attention on critical elements.
James West: Right. Relative to other ACMPR facilities that you’ve been to, what, visually, differentiates CannTrust facilities from, I’m not going to name anybody specific, but just think of some of the less impressive facilities you might have seen. What is it that makes CannTrust stand out visually when you go there?
Charles Taerk: Sure. So the new facility, everybody talks about state-of-the-art; one of the most impressive aspects of the new facility at CannTrust is their, what I’ll call modular or automated tabletops. What it allows the growing space to do is to maximize the amount of plants under glass, or under light, while having very limited human intervention. So everything can be moved around – they will move these large trayed tables through a room, giving it various light, various heat, various temperature changes, to allow the plants to grow to their maximum potential, and again, maximizing space by not having rows in between the tables to have people move through. The tables move through, and then the tables come out.
If there’s a sensor that senses a problem with one of the areas, then that table automatically comes out of the roll and then people can look at it from an easier space. So it doesn’t take away from the operations, and as a result, they’re getting more grow per square foot than most, if not all, of the other cannabis facilities around.
James West: Right. We had Brad on last week, and he mentioned that he was actually experiencing up to 500 grams per square foot, which is, you know, that’s the highest number I’ve heard credibly stated by a publicly traded company that has to report those things very accurately.
Charles Taerk: That’s right.
James West: The relationship that the company has with Apotex, this is one of the things I like to zero in on because to me, in the future, where producing cannabis is going to be essentially a crowded space, and companies that have a built-in distribution channel to a retail market with consumer-facing products are in a better position going forward to the long term than would be a pure-play producer.
Charles Taerk: Sure, absolutely, and I think part of what we were just talking about in terms of their operational efficiency rolls from Apotex. So Apotex, the largest generic drug manufacturer in the country, I think they’re the seventh-largest in the world. And part of their arrangement with Apotex and CannTrust is, helping them with their intellectual property, helping them file patents, and then as you’ve mentioned, distribution globally.
Apotex is in 115 countries, so when we start talking about the global market for cannabis, Apotex is well situated to help CannTrust get into those critical markets. So it’s a focus on IP, on patents, on the medical market, medical market is going to be the higher margin business; the global business is much larger than Canada. I mean, all of those checkmarks lead us to having CannTrust as our largest holding.
James West: Okay. I’m curious as to the importance of the idea of a medically standardized genetic set that they operate from, that gives them the ability to produce a consistent product in terms of, you know, content of THC versus CBD in every crop so that they know what they’re getting before they actually harvest it. How many other companies are able to do that?
Charles Taerk: Well, a few. You know, again, the medically focused producers that we have in our universe, you can really differentiate them by their sustainability of the level of THC and CBD, and the different types of value-added products that they’re delivering. The innovation in the sector is now, you know, taking this sector from what people traditionally thought of as dried bud into extraction technologies, creating oil, and then with oil they’re making gel caps, pills, soft-gels, sublingual sprays…those types of products are the value added dosage with consistent delivery.
That combination is going to address the medical markets. The doctors that may not have been sold on selling dried weed, now, we’re delivering a gel cap or a soft gel or a time-release; all the dosages that they are more familiar with, in a more traditional medical setting.
James West: Okay. Besides CannTrust, do you have any other ACMPR producers that you’re really enamored of?
Charles Taerk: Sure. We also really like Cronos Group. Here’s a company that stands out for a coupe of really good reasons: this is the first company, first marijuana company to list on the NASDAQ, and that was a real eye-opener. I know that previous to its NASDAQ listing, the company was getting a lot of heat because they were listed on the CSC and you saw on message boards, and people were asking questions, well, why don’t you move to the TSX?
So credit to Mike Gorenstein and his team that they leapfrogged the TSX and went to NASDAQ; I think that’s really important because lately there have been articles in the Canadian media about governance and management practices and disclosure. When you list on the NASDAQ, you go through a fine-toothed comb before they give you a listing, and it’s also very regimented in terms of the monitoring and the maintenance of your listing.
So for Cronos to go there and to maintain what I would say is a higher standard, is great on them. I think what it allows them to do is attract new institutional investors, new American retail investors, and bring a new awareness to the sector, so I think it’s great.
Why do I think they stand out from an operational standpoint? They’re building a new, 280-000 square foot facility just north of the city, near Staynor, Ontario, and we toured that facility recently. It’s coming along really well. Many grow rooms, they still have the older facility that they acquired or took over from the original Pharmacan business, and again, here’s a company that’s doing really well generating very efficient plants, high THC content, and are one of only very few Canadian licensed producers that are GMP certified.
So GMP certification, for those that aren’t aware, allows you to ship a product into Europe. That’s really a major, major important part of this whole business. So if you’ve got GMP certification, the world is your oyster, and Cronos achieved GMP certification almost a year ago. So they’re among the Canadian leaders, which I think is why they get a premium valuation.
James West: Sure. And correct me if I’m wrong, but doesn’t Cronos have a package of assets that actually consist of other licenses and brands under the Cronos umbrella?
Charles Taerk: Yeah. So they’ve got the Peace Naturals brand, which is the facility we were at, and that’s largely their medical offering; they also have interests in some of the other Canadian licensed producers, and then they’ve also invested outside of the country, most notably in Israel, where they’ve teamed up with a kibbutz that has a great history in exporting fruits and vegetables, and they’re now going to be getting into the cannabis business.
One of the interesting aspects about that is, we have great growing conditions for fruit and vegetables and cannabis in this country; Israel has more light, more sunshine, but also not a lot of humidity, and humidity is something that has to be adjusted constantly in Canada, especially in the summer when we have a lot of heat and a lot of humidity, especially in Southern Ontario.
James West: Right.
Charles Taerk: In Israel, humidity is not as much of an issue. So we anticipate seeing a lower cost per gram, given all those factors, in what they’re going to be producing in Israel.
So, very smart team of operators at Cronos, looking for international expansion, and I think they’re doing a really good job.
James West: Great. All right, Charles, let’s leave it there for now. We’ll come back with another segment. Thanks for coming in today.
Charles Taerk: Okay, my pleasure.
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