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VIDEO: Fund Manager on Canopy Growth Corp (TSE:WEED) Industry Catalysts and Cannabis Beverages

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Ninepoint UIT Alternative Health Fund Manager Charles Taerk shares his thoughts on the Constellation deal and what it means for the global cannabis market. Taerk states that companies like Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E), Aurora Cannabis Inc (TSE:ACB) (OTCMKTS:ACBFF) (FRA:21P), CannTrust Holdings Inc (TSE:TRST) (OTCMKTS:CNTTF) (FRA:C9S), OrganiGram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) (FRA:0OG), Cronos Group Inc (NASDAQ:CRON) (TSE:CRON) (FRA:7CI), and Tilray Inc (NASDAQ:TLRY) (FRA:2HQ) all have the production capability to enter into a similar agreement with a beverage or pharmaceutical company. Taerk addresses regulatory changes in the US market and why Canopy Growth Corp’s (TSE:WEED) (NYSE:CGC) (FRA:11L1) stock has been soaring. Taerk reviews the specifics of the Ninepoint UIT Alternative Health Fund, the first actively managed mutual fund to focus on the cannabis space.

Transcript:

James West:   Welcome back. We have our special guest and friend of the show I’m going to categorize you as, because you are a friend of the show, Charles.

Charles Taerk: Why, thank you.

James West:   We can call you on short notice and here you are. And Charles Taerk is the co-manager of the Ninepoint UIT Alternative Health Fund. Charles, welcome back.

Charles Taerk: Thanks very much.

James West:   And you’ve been doing a little sojourning around the planet, I hear?

Charles Taerk: Yeah, had a little holiday during August.

James West:   Did you? Where did you go? What did you do?

Charles Taerk: Took the family down to Colorado and did a little hiking and biking and golf –

James West:   Oh, nice.

Ed Milewski:  Very, very healthy.

Charles Taerk: A little rafting, all kinds of outdoor activities.

Ed Milewski:  And I notice Colorado, it’s legal there, right?

James West:   Exactly.

Charles Taerk: Yes, it is.

James West:   Were you sampling some product?

Charles Taerk: We did some due diligence.

James West:   [laughter] Did some due diligence, ah, there we go! Interesting. So, do you feel like being away in the month of August that you missed some action?

Charles Taerk: I wasn’t that far away. There were emails and phone calls, and the first week of the holiday was pretty quiet; that was the early part of August. And then the world changed on the 15th.

Ed Milewski:  Is that the date that Canopy sold another whatever to Constellation? That was a big day.

James West:   It wasn’t a change of control, yet.

Charles Taerk: No; they have the opportunity to go up to 55 percent, but really what it was – I think the shocking part of this was, it’s $5 billion CAD. And back in November, when originally they said it was 250 million, their original investment, just think about the gain that they’ve made, that Constellation has made on that original investment. So, 250 million got them 9.9 percent and they had an option for a period of time to buy another 9.9 percent, and it really was a shot in the arm for the industry, because it was very early, but it told people that this is more than just about domestic recreational; this is more than just domestic medical. There is a global business, and a new global industry.

And so the first shot was November, and then the market took off, and you know, obviously in August, we got a new shot in the arm.

Now the question is, who’s next?

James West:   Right. So based on that million-dollar question, who do you think could be next?

Charles Taerk: Well, you know, there’s a short list of companies, if you look at the Canadian LPs, you’ve got to ask yourself who has the capability to at least demonstrate that they have the wherewithal to have scale? Because we’re talking about global brands, global businesses, a lot of product, and good management teams. So there’s probably five or six companies that –

Ed Milewski:  All billion-dollar companies probably, already.

Charles Taerk: At this point, yeah, I’ve lost track, but yeah. So you’re looking at Aphria, Aurora, CannTrust, OrganiGram –

Ed Milewski:  Cronos?

Charles Taerk: Cronos for sure. And Tilray. I think those names would be ones that have the financial wherewithal and the production capability to meet the potential due diligence of, you know, whether it’s the beverage industry or the pharmaceutical industry.

James West:   I watched a segment on CNBC, it was back in April after Rob Sands of Constellation Brands was being interviewed on his investment in the cannabis space. And at the time, this is in April, he’s gloating about how well their investment in this company has done, and it was interesting to watch, because Jim Kramer is trying to elicit some, you know, some direction on where is there going to be a greater investment down the road, which of course Rob Sands was tight-lipped about.

Ed Milewski:  Very professional.

James West:   And watching that, you just couldn’t get a read on it. But I look at the way the whole Constellation-Canopy tie-up has unfolded, and I juxtapose that to, for example, the Molson-Coors HEXO tie-up, and it’s just like one is a textbook case of mutual driving catalysts driving each other’s valuations higher and creating a success, while the other one is the opposite of that. And so, what’s your takeaway? Like, it almost strikes me as, like, these guys had this in mind. This was planned. They said, you know, we’ll buy a piece of you, then you’ll drive our stock up, and –

Charles Taerk: Well, I don’t know that it’s as simple as that. I think that there’s been a significant amount of regulatory change in the US over the last six to nine months, just after the original Constellation deal, and I think that Constellation is kind of reading the tea leaves and seeing the regulatory changes, seeing the Senate, Congress, state Senators, more and more people are in favour of legalizing by state and even at the Federal level. And so they’re putting pieces together to say, look: we need to be ready. Our opinion is, Constellation wants to be ready both for global but also on the potential that cannabis becomes Federally legal in the United States. And I lead people to the press release the day that it was announced: it was quite interesting, because there was a part of the press release that said, you know, they’re building out, they’ve got a $5 billion war chest for M&A, R&D, production, and capabilities throughout the world – including the opportunity in the United States.

And if you can think about that for a second, how many lawyers were involved in this transaction? Got to be 30, let’s just say; but they all looked at that press release, both north of the border and south of the border, and what’s interesting is that legal counsel didn’t have a problem saying the potential for the US market.

So if you just think about the US market for a second, there is no single large player. There are state players. Some companies are in seven or eight states, but now you’ve got the muscle of Constellation brands that as soon as that light goes off, if it does, then they have the capital to make a significant acquisition and be the player.

And so I think that’s where the optionality comes; that’s why people are looking at Canopy as, you know, a mid-$60 stock now. Yes, it’s trading a little ahead of itself, but it’s the go-to name, and so the opportunity is significant.

James West:   Sure. Sure. How do you, you know, okay, so, looking at the performance and the share price of Canopy as a result of STZ makes sense; that justifies the valuation it has at 32 billion or something. Then I look at Tilray, and Tilray has got an equally monstrous valuation, but without nearly the sort of back-filled elements of the value chain that underpin Canopy’s valuation. So you look at that and you say, well, that’s got to be pure speculation, going into that.

Charles Taerk: Well, and different. Look, when you’re putting together a portfolio, your Top 10 all represent a different element. They’re in the Top 10 for slightly different reasons. So with Tilray, it’s a very different story. Just went public, listed in the US, and it is operating in 11 countries on five continents, so it’s a new name in Canada, but as a private enterprise, they have set up distribution throughout the world.

So people are looking at Tilray, I think, a little bit more on the pharma side. They signed a deal with Novartis; they’re the first cannabis company to have a deal with a pharma, and they’re going to be stamping the Sandoz label, logo, on their cannabis pill coming up. So that’s a major achievement, both from an operational standpoint – you know, clearing due diligence with a pharmaceutical company. But if you think about it, if you’ve cleared due diligence, you know, from a GMP certification standpoint, think about how easy it would be to sign a contract with a beverage maker? Beverage distributor? The level of due diligence required for them would be much lower than pharmaceutical grade.

So I look at Tilray as, people are kind of putting a valuation on the fact that they’re ready, because they’ve already passed the muster, so it’s a matter of valuation and operation, and who’s going to work with who.

Now, again, I don’t have any inside information that Diageo or Brown Forman or Heineken is speaking to anybody; I’m just saying, when you look at the companies, there are some that line up better than others.

Ed Milewski:  Right, right.

James West:   So, you think this is the big value catalyst that is being priced into the market now, is that the market is saying well, one of these four is going to be next?

Charles Taerk: Yeah, I think that’s what’s happening, and you’re also seeing, I think, a real difference in those few names that are listed on US exchanges. So whether it’s Canopy, Cronos, Tilray, who are US-listed. So American investors really prefer to be investing on their exchanges rather than coming north to the TSX.

Ed Milewski:  So do you think it also means that some of the smaller issuers are probably not going to get the valuations? In other words, as money goes into the bigger ones, maybe the smaller ones get neglected to some degree?

Charles Taerk: Yeah, maybe. I think they’re going to have to prove themselves a little bit. They’re not all going to get ignored, but there’s second-tier –

Ed Milewski:  Sure. They’re going to have to have some fundamentals, there, to make it look like, hey, they got lots of cash or they got reasonably good management…

Charles Taerk: Yeah, or, you know, execution strength with respect to extraction, or they’re low-cost producers, or they’ve got a niche. We’re growing this market of boutique or craft growers, being able to stand out in that business. But again, it’s going to be domestic, primarily. We really need to think about it as Canadians that we were educated over the last two years to think domestic recreational. Now, the opportunity is to look at the global business, and when you look at a global industry, how many companies are really able to do that?

And so at this point, it’s very few.

Ed Milewski:  Like, obviously Canopy Growth is the kingpin right now with their relationship with Constellation; there’s really nobody else there, right?

James West:   Nobody.

Charles Taerk: Right.

Ed Milewski:  And you know, you could even argue that some of the valuations that, like Tilray, I mean – but we’ve also said there’s some strong money people behind this Tilray.

James West:   That’s true, that’s the Silicon Valley cannabis play. I think of it as the Silicon Valley play.

Charles Taerk: Very smart money behind Tilray.

Ed Milewski:  You know, big money talks; little money walks.

James West:   [laughter]

Charles Taerk: And so the other part of this that’s quite interesting for investors is, the Canadian names have all run a great deal, but this is a global industry, and we should be taking a look at companies that are focused outside of Canada as well, because the valuation that some of those companies are getting are ignoring some of the potential value, whether it’s a US company or companies focused in Europe or South America. There are businesses that are growing that have significant revenue growth, have earnings, and in some cases, you know, have better financials than what’s going on in Canada, but they’re getting ignored because they’re not the top four or five names.

Ed Milewski:  And you know, there’s got to be big pools of money out there that have missed this, and they’re thinking, how do we get involved, right? Because people can’t stand not being involved, like, you know, whether they’re politicians or, you know, like certain countries are sitting there like, hell, this was so obvious in retrospect! But you know how everybody wants to be part of something hot.

James West:   Right. So then, talking about companies that are in that top sort of quartile, Cronos Group was a featured subject of a short report from Citron Research by Andrew Left, and by many accounts, the premise of the go-short strategy was not strong. Excuse me. Which is reflected in the share price, which has made almost a full recovery now; looks like it’s going to go right by that. So –

Ed Milewski:  Or double top.

James West:   Or double top. You know what? You always confuse me when you start talking technical.

Ed Milewski:  You know, that was a lot of damage done, and as it claws back to those old highs, it starts to lose steam, and people, you know, anyway, you know, I’ve been watching this stuff now for 35 years, and you know, 35 years ago I thought I could read charts; now I realize nobody can read. But I mean, look, there are things you look for: you look for volume, and you know the markets can remain illogical longer than you can remain solvent, right? If you stand in front of this, you can get hurt.

Charles Taerk: That’s right. And so you have to be careful. If you’re going to go into a position, you’ve got to –

Ed Milewski:  Oh yeah. Well, it’s just like, people that’s probably shorted Cronos on Thursday, now they’re thinking, why did I do that? Like, you know –

James West:   So that, was there any – did you read the report?

Charles Taerk: Yeah.

James West:   And was there anything there that you would consider as substantial, you know, misrepresentation on Cronos’ part?

Charles Taerk: Well, no, we didn’t – we read it with, we were kind of concerned, because I think the biggest part that was a head-scratcher was with respect to the provincial supply agreements, and not disclosing prices or volume or the details of their contracts. But our understanding is that the provinces asked most, if not all, suppliers, not to disclose that information. So they were being singled out to, saying they weren’t disclosing, they were actually doing what they were told by the regulator.

And, you know, here have been some discrepancies, if you go back over time, when HEXO, Hydropothecary, signed their supply agreement with Quebec; they were the only supplier that disclosed information about their contract. The other LPs didn’t disclose. They were all asked not to, but somehow the press got some of the terms of that, and you remember with Alberta, Alberta named many suppliers, but only a few of them announced that there was an allocation up to a certain amount. So it wasn’t a hard number, it was the province saying, we could ask of you a certain amount of supply, and it’s going to depend on demand.

So we were surprised that Citron came in with that, because they’ve done some really good work in the past and brought some companies down and brought some fraud to light, but here was a situation here I don’t think that had much merit.

So good for Cronos to get in front of it and answer the questions, and I think people on the investment community side realized what’s what, and they’re now marching back.

James West:   Yeah, Charles, we’ve been talking about all these different companies; why don’t we talk about your fund a bit? Because your fund does very well in the space.

Charles Taerk: Thank you.

James West:   So, tell us about the fund and how it’s been performing.

Charles Taerk: Sure. So just as a recap for some people that don’t know, it’s called the Ninepoint UIT Alternative Health Fund. We were first –

Ed Milewski:  Why nine?

Charles Taerk: Well, Ninepoint is the fund sponsor, fund manager. We were running it alone in the first year, starting in March 2017, and we just weren’t getting awareness, sales, traction. We joined up with Ninepoint Partners, which is the former Sprott Asset Management.

Ed Milewski:  Right, that’s right, yeah.

Charles Taerk: And got that team behind us, and since April we’ve really been able to grow our asset base well, and the performance continues. So we were the first mutual fund in March of 2017 to be an actively managed fund focused on the cannabis space. We call it Alternative Health because cannabis fits in our strategy with everything from pharma to new forms of medicines and health. So it’s everything from health and wellness, like Jamieson Wellness, to health care technologies, to cannabis industry. And by having a wider portfolio allocation, we reduce the volatility that we talk about in the cannabis sector while still giving people growth.

Ed Milewski:  How many – excuse me, but how many issuers are involved, are you invested in?

Charles Taerk: Yeah, the portfolio has about 35 companies. We like to keep it fairly concentrated, and of that, our Top 10, which is going to be coming out for the end of August very soon, nine of the Top 10 are cannabis-related companies, and that is, you know, that changes over time, because we are active.

We’re very proud of our performance, both from a total returns standpoint but also from a volatility standpoint. We are reducing the risk associated with people investing in the cannabis sector, because the volatility, as you know, I was watching before when I came in, the vol is significant. And the swings are really high. So how can you reduce that volatility and keep people invested for the long term? So we do that by being active; periodically we’ll go to cash if we believe that a name is trading way ahead of itself, we’ll take some profit. Two, we do own some privates. Three, I mentioned the portfolio allocation; and then four, most recently we started an options strategy in the fund for the sector, because the volatility and liquidity is now conducive –

Ed Milewski:  Like call writing?

Charles Taerk: Yeah, we’ll do covered calls and we’ll do cash-secured puts. You know, the cash-secured puts are giving us a great opportunity with the high volatility, and our belief that some of the names might be trading ahead of themselves. We’re able to look in and leg into a name while earning a significant premium while we’re waiting for the stock to come to our price.

So all told, our one-year performance is, we’re up 87 percent. This is after I said we’re trying to reduce the volatility. But what’s great about it is, the volatility is less than half the volatility of the Index. So the Marijuana Index has a volatility of over 55, and our standard deviation is 22.

Ed Milewski:  Sure. Can you disclose how much money’s in the fund?

Charles Taerk: The fund is a little over $30 million now.

Ed Milewski:  Good, good.

James West:   Okay. So then, what are – are you guys looking at new names as they come on in the cannabis space now?

Charles Taerk: Yeah, and not just cannabis. One name that started trading last week that people thought was a cannabis name, it’s a CBD name, which is Stanley Brothers. So they’re in the hemp business, and again, part of the regulatory change in the US that occurred over the last six months, the Farm Bill that was signed back in June really has provided flexibility for industrial hemp. And Stanley Bros. has been around for many years; Charlotte’s Web is their retail brand that people are very well aware of, got a lot of feature over the years on CNN and CNBC, and so we invested in the new issue, in the IPO.

James West:   What’s the symbol on that one?

Charles Taerk: CWEB.

James West:   CWEB, okay. I got a few thousand bucks worth of that on the President’s list, and I didn’t even know it went public. So there’s how plugged in I am. [laughter] Oh, wow. Oh, that’s the wrong.

Charles Taerk: No, that’s not it. It came out around 9 or something.

James West:   It’s on the CSE, I’m assuming.

Charles Taerk: Yes.

James West:   Okay, that’s what the problem is.

Charles Taerk: There we go.

James West:   Well, that’s doing pretty good. IPO’d at $7, didn’t it?

Charles Taerk: Yeah, it started last week.

James West:   So that’s great, it’s up to $12.

Charles Taerk: Yeah.

James West:   Oh.

Charles Taerk: And so, hemp is also seeing –

Ed Milewski:  Where were we?

James West:   I don’t know where you are, but apparently it’s sitting out there in the West Coast somewhere.

Ed Milewski:  Am I chopped liver? Like –

Charles Taerk: James, you’re not sharing.

Ed Milewski:  All these brokers I know, I didn’t get any calls.

James West:   I didn’t get any calls, either. In fact, the only way I got into that stock was, the guy who’s heading up their Investor Relations strategy, Cory Paulo (phon), was here with Emblem, who it also represents, and he was telling me about the thing, and I said hey, I would like to have some of that, because, you know, I’m a big fan of the Stanley Brothers. There’s a few other reasons to be talking to them. And so he said ‘Oh, I’ll see what I can do’ and he got me $50,000 bucks, for which I’m now very grateful.

Charles Taerk: So the CBD oil, the reason they call it CWEB is after their famous patient, who’s name is Charlotte, Charlotte’s Web.

Ed Milewski:  Yeah, yeah, great story. Great story.

Charles Taerk: And really it speaks to the legitimacy of the medicinal properties of cannabis oil, CBD oil, and you can get CBD oil out of hemp. So they’re doing really well; I think last year’s revenue for Stanley Brothers was $40 million USD, and they did $8.5 million in net income. So real business.

James West:   Wow, wow.

Charles Taerk: Hence the attention.

James West:   So this thing has the potential to go, you know, like, I look at the Tilray number and I’m looking at Charlotte’s Web and thinking oh, this could be next.

Charles Taerk: Yeah.

James West:   Huh, fascinating.

Ed Milewski:  You know, one observation I sort of made where you went, like, say, six months ago, nine months ago, when they’re all hot, they’re all flying, it’s gotten a little more selective, hasn’t it? Like, it’s gotten more selective in some, like, we saw Cronos back off sharply while the others are racing ahead. So there’s, you know, it just seems to me that there’s a more discerning market out there.

Charles Taerk: Yeah. I think last year it was early; I mean, it’s been three or four years, but it was very early and they all traded in the same type of direction. One company had positive news, they all went; on the other side, one company had bad news, they all fell. This year, with more liquidity, more market awareness, the companies are now trading based on their own financial results, their own press releases, their own joint ventures.

Ed Milewski:  For instance, one issue, and Isodiol – I can never say that properly.

James West:   Did that thing ever come back to trade?

Ed Milewski:  I don’t think it’s back yet. But that was $21 after they consolidated on an equivalent basis, and it’s $3.50. you can’t even see that move from 3 to 3.50 in the chart, because it’s sort of – and I guess there’s some issues, right?

Charles Taerk: Sure, yeah. I mean, that’s, over time, people start to dig into it, and –

Ed Milewski:  Pay a little more attention. Sharpen their pencils.

James West:   Hmm. Okay, yeah, so still halted, there. Interesting. So now there’s one of the companies that I’m really looking forward to coming to trade is Canopy Rivers, who is, by way of full disclosure, a client of our media production and traffic generation group. So that out of the way, I’m curious as to your opinion on your level of anticipation of Canopy Rivers, given that it’s such an interesting portfolio of products.

Charles Taerk: Sure, and that’s what’s interesting about it, is it’s really an incubator for craft and small cannabis companies. So whether they’re doing R&D or they’re doing product innovation, doing the science around the plant, that’s what Canopy Rivers is devoting themselves to. So there’s an opportunity to commercialise those innovations. So that’ll be very exciting.

James West:   Yeah. So do you think that having Canopy Rivers as a partner as an investor in your company, is in and of itself sort of a value catalyst in the form of a backstop on financing? You know that you’re not going to be allowed to run out of money when you’ve got such a –

Charles Taerk: Well, I wouldn’t say that you won’t be allowed to run out of money; there’s milestones that these companies have to hit, and I think from the Canopy Rivers management standpoint, they get to see who’s successful and who’s moving the chains, and those companies that are having trouble, they can look to see what kind of attention or assistance they need, but sometimes things don’t work out. So I wouldn’t say it’s an automatic, but I would say that the portfolio approach diversifies Canopy Rivers’ risk, right? So they’re going to have ten horses to run with, and they’ll be able to sift through and pick the best ones.

James West:   Yeah, right.

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