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Horizons ETFs CEO on 2019 Optimism and Canadian LP Advantage

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Horizons ETFs Management (Canada) Inc President and CEO Steve Hawkins provides his 2019 outlook with regards to the cannabis space. Hawkins believes there are a few catalysts driving the current cannabis bounce including a recent briefing by major financial institution, Royal Bank of Canada, announcing its involvement in the sector. In particular, Hawkins is enthusiastic about Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E) rebound and believes it’s a positive sign for the space. Hawkins notes that cannabis prices are not currently correlated to broader market and can be used as a hedge against broader market volatility. Hawkins believes the US names listed on Canadian exchanges are relatively undervalued on a fundamental basis but believes the spread is narrowing. Hawkins notes that the Canadian names in the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) (OTCMKTS:HMLSF) are getting global exposure and still hold the advantage over their American peers.

Transcript:

James West:   Now right now I’ve got, returning for the first time in 2019, Steve Hawkins, the CEO of Horizons ETF.

Steve Hawkins: James, Happy New Year.

James West:   Happy New Year to you, too. Steve, the Horizons ETF is, you know, it was looking like it was a safe place to be relative to a lot of other stocks in the cannabis sector. What’s your outlook for 2019 in terms of what you’re liking in the ETF?

Steve Hawkins: Well, I mean, I think this is sort of like a continuation of the same story that we’ve had over the past month. You know, we saw huge equity market volatility, and we saw, outside of Aphria, a nice starter uptick in the cannabis stocks. It’s almost like an inverse volatility play to the equity markets.

So we’re going to see equity market volatility, we hope, settle down here, but we’re seeing a nice little run in the cannabis space, right now, especially with all those short term news, new research analysts coming online with big firms like RBC, Piper Jaffrey, picking up Canadian Stocks, US stocks. You know, RBC is a bank saying that they’re going to get involved in the investment banking side of the deals in the space…that’s all very, very continued positive news, and right, as we know, this has been an extremely news-driven sector.

You know, the short-sellers on Aphria I think are getting screwed right now, which is great, I think, for the industry, and I  think people not overreacting to those types of stories anymore, I think some people will hopefully have learned a little bit of a lesson  here and we’ll start to see volatility come down a little bit. But I think we’re going to continue to see a nice little slide upward in the sector.

James West:   So we’ve been sitting here this afternoon looking at the market, the market’s on a tear, we’re trying to find a macro-catalyst to say ‘Well, this is what’s driving the market’ and we can’t find anything! But from what you’re saying, it’s actually a combination of these catalysts in sort of the upper levels of the major banking sector that are too high for us to see and so we don’t really know what’s going on, but that’s a reasonable explanation.

Steve Hawkins: I think it’s one of the drivers, but you know, I think people going into year-end, we’re still a little jittery of what was going on and then they say huge equity market volatility, and marijuana stocks were a safe haven. Even though there’s a lot of intra-day volatility in a lot of names, we were seeing some nice flows into our ETF, especially, because we provide a broader diversified exposure to the sector. And I wold not have wanted to own Aphria personally when it dropped by almost 100 percent, but you know, we were on the ride on the way down, but we’re on the ride on the ay up, so it’s been up, I think it’s up 80 percent form its lows already in less than a month.

I mean, I think that’s great, for the sector, and you know just news generally what’s going on with Canopy with respect to their stores and they’re working deals out; Aphria closing the Germany deal; you know, financials started actually being reported form a real-time perspective; you know maybe some of them are slightly under valuation of expectations, but they’re still coming in very, very positive in a year-over-year basis.

You know, you have one of the lead analysts in the US saying they think they underestimated US, Canada and global medical marijuana sales. I mean, that’s also a nice little catalyst. I think all these little kicks in the butt for the sector are great.

James West:   Interesting. So then, if you were a betting man, would you bet that this positivity that we’re seeing in the whole sector is likely to continue, even – like, I’m looking at the S&P today, it’s up like 0.2 percent, so it’s not like correlated to the broader market and it looks like there’s a lot more risk in here, especially as it pertains to Brexit and China-US relations, and interest rates, etcetera. But the cannabis market’s just saying, like, yeah, that doesn’t pertain to us.

Steve Hawkins: That is absolutely true. Like, none of those macro factors affect the cannabis space, which is very, very interesting, why you can actually use cannabis as a hedge against general market activity right now.

So for me, from a shorter and longer term perspective thing, we’ve seen a nice little rise here, like 20 to 50 percent in the last month. Last time I was on the show in earlier December, you know, we were starting to see a nice little consolidation phase, and I said, look for a nice little breakout right now. Boom! It’s already happened.

James West:   Right.

Steve Hawkins: So what’s going to happen from here? I’m hoping that, you know, there’ll be continued positive news, and is that going to drive it higher? Maybe. I mean, I think we might consolidate again a little bit here before we see another nice little jump higher, but I still continue to see 2019, we’re going to see some nice uptick in the cannabis sector, and I think more specifically, especially in the US names that are listed in Canada. I think those are reactively undervalued to the Canadian companies, and so I think if we’re going to look for more specific upside, I think that’s where I would be focused on a more short term basis.

But I’m still very, very positive of the long term prospects of the cannabis sector, and especially in Canada.

James West:   Yeah, you bet. The US MSOs that are listed in Canada have typically been characterized by under-performance since their IPOs, and their prices, the share prices themselves, coming into the market as an IPO have been eye-poppingly high relative to where Canadian companies tend to start. Now granted, the US market – markets, as each one is essentially a distinct market the way things are – are far more numerous and far larger, each and of themselves.

So when you say that you think they’re undervalued, do you think they’re undervalued relative to the size of their markets, or relative to, on a dollar for dollar basis, Canadian stocks?

Steve Hawkins: The latter. So I think when you’re looking at it just on a pure fundamental basis, from a quantitative perspective, I think the Canadian companies are a little bit more overvalued than the US companies, especially after this little run. But I think that spread is narrowing, and it’s going to continue to narrow. But a month ago, that spread was significantly more. Even though we’ve seen a nice run on the Canadian stocks, we’ve seen a pretty good run on the US stocks. But on an overall basis, I think that spread is narrowing, but I still think US stocks are quantitatively undervalued relative to Canadian companies.

James West:   Mm-hmm. Okay, so HMMJ does not invest in Canadian companies operating in the US, though, is that right?

Steve Hawkins: That is correct.

James West:   So I mean, looking at the performance of the US ones relative to the Canadian ones, has that turned out to be a blessing in disguise, in that you haven’t been able to participate in those big overpriced IPOs that came out and crapped the bed out of Day One?

Steve Hawkins: In some cases, for sure. But it also hindered us when you have companies like Tilray when they did their IPO at $17 and then traded up to $195 kind of thing, right? And we weren’t’ able to buy it coming in after the IPO market, because we’re not as nimble as an active portfolio manager can be.

But when you still look at it on a long term basis, people were shorting Tilray, Tilray’s price has been extremely volatile, a lot of people got out of Tilray, you know, at $150, at $100, you know, even down to $75. We continued to own the stock and we’ve been able to see the nice appreciation and the value once we had averaged in on a stock price basis.

So, you know, active management can have some short term positive things for you, but owning a nice passive vehicle like HMMJ, even though it doesn’t own companies operating in the US, still is giving us a really nice, broad exposure to the marijuana market – especially since the Canadian companies are now operating outside of the Canada. You know, I mean, the Aurora deal that closed in Germany, you know, there’s lots of global expansion going on with respect to marijuana generally in the cannabis space. So we’re getting global exposure out of our Canadian companies again. We talked about this before, but this is where, you know, this is the great thing about Trump: he’s given the Canadian companies a leg up over the world over the US companies, because they can’t get out of their states!

James West:   Right.

Steve Hawkins: And we love that, from a Canadian company perspective.

James West:   You bet.

Steve Hawkins: But I mean, the US company investors are not seeing the benefits, yet.

James West:   Yeah, for sure. All right, Steve, well that’s great perspective as usual. We’ll leave it there and come back to you in a week or so, and thank you very much for joining me once again.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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