AlphaNorth Asset Management Addresses Cannabis Boom Impact on Resource Investing

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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.

AlphaNorth Asset Management is an investment firm primarily focused on Canadian small cap names. Portfolio Manager Tina Byers, CFA explains that AlphaNorth manages a hedge fund prioritizing sub-$100 million market cap companies with the potential for high-growth as well as two mutual funds with focused on companies with market caps between $100 million and $1 billion. Byers reveals that the hedge fund is focused on technology and biotechnology companies but also has a stake in several resource plays. She discusses the impact of the cannabis sector on the resource space and admits that the cannabis boom has impacted retail commodities investing. This is especially true in the case of industrial metals, which are slower moving and cannot currently compete with the returns generated in the cannabis space. Byers points to Yangarra Resources Ltd (TSE:YGR) (OTCMKTS:YGRAF) (FRA:702B) as a name to watch because the company grew its production by 65 percent in 2018.

Transcript:

James West:   So Tina, tell me: what do you do at Alpha North Asset Management?

Tina Byers:   I’m a portfolio manager at Alpha North, so we have three funds. Our flagship fund is a hedge fund; we look at sub-$100 million market cap companies, and it’s diversified, so really focusing on high growth opportunities. And we have two mutual funds as well that are focused on the 100 million to billion market cap. So, mostly small and micro cap space.

James West:   Okay. Would it be impertinent to ask how much assets under management at Alpha North?

Tina Byers:   We have about 40 million right now.

James West:   Okay, great. You – do you guys participate in the cannabis space at all?

Tina Byers:   We do. In terms of what we’re invested in, we haven’t been looking strictly at the LPs, I guess. We do trade them in and out; in terms of an investment, we think that a lot of them are overvalued, but we’ve been looking a lot at ancillary services like extraction companies or some technology companies or beverages – kind of a different angle to the cannabis space that I think is a little bit more undervalued.

James West:   Wow. That’s probably a good thing, especially looking at the LP prices today. Okay, so what sector is Alpha North most interested in, would you say, in terms of, you know, industrial sectors?

Tina Byers:   Um, I guess we look at the industrials a little bit. I think for a hedge fund, we’re focused largely on tech and health care biotech, and we did a little bit of resources as well. I think this year, the resources are due for a bit of a comeback, so I think that’s a space that we’re paying more attention to rather than the cannabis space last year, although I do think there’s still going to be a trade in cannabis this year, so.

James West:   Right, right. Interesting. Do you – are you in the camp that believes that a recession is coming in 2019, or are you in the camp that is more bullish on the general broad market?

Tina Byers:   I’m a little bit more bullish, I’d say. I don’t think 2019 is the year; it could be a little bit further out. In terms of the S&P, we’re still trading at 13.5 average, which is partly because of the energy space. I think if that comes back, and some of these resources come back, there’s still some room to go.

James West:   And then within resources, what are your favourite sort of commodities that you’re following?

Tina Byers:   I like the energy space. I think it’s been kind of controversial lately –

James West:   You mean the oil and gas?

Tina Byers:   Yeah.

James West:   Okay.

Tina Byers:   Mostly oil, I’d say.

James West:   Okay.

Tina Byers:   The valuations are just lower than they’ve ever been, I think, so some of the names have had a pop back up, but for the most part, they’re not getting the credit that they have given that WCS has come back a bit, and WTI is also, like, trading just under $55.

James West:   And most of the big energy companies reported pretty decent earnings this quarter, the past quarter.

Tina Byers:   Well, Suncorp came out with their numbers today; they were a little bit lower than expected on a cash flow basis, but –

James West:   I wasn’t including the Canadian oilsands, guys, because I mean, oilsands in Canada are just such a sort of stranded resource because of all the problems we’re having getting pipelines and transportation out of there.

Tina Byers:   Yeah. It’s been really tough, I think, for a lot of the Canadian companies, as you can see by their share prices; but you get to a certain point where a lot of the companies have contracted their costs and their netbacks are doing okay, and they’re able to manage their costs, like, way better than they were able to a few years ago.

So I think now is kind of a good time to be buying and looking at these valuations and realizing that they are quite cheap given the environment.

James West:   Are you, again, referring to the large caps more or less, or to –

Tina Byers:   More so on the small caps for investment purposes?

James West:   Can you talk about any names specifically?

Tina Byers:   Sure. Yangarra is a company that I really like. It was trading really well for the last few years, and 2018 was kind of a rougher year for the company.

James West:   Yangarra?

Tina Byers:   Yangarra Resources; it’s YGR on the ticker. But they grew their production 65 percent last year.

James West:   Where are they producing?

Tina Byers:   They’re in Alberta.

James West:   Oh, okay, the good old Alberta Basin.

Tina Byers:   They do get admin to par pricing, though, for their oil, so it’s a little bit better than the WCS.

James West:   Ah, okay. You know, it’s funny: I mean, you can’t be Canadian without having been in the energy space as an investor, but it’s been so long, largely because of cannabis, but also the mining market took such a plunge that – you know, the resource sector has not been kind to me. So let’s just say it’s amazing I used to follow it so closely and sort of have an idea of any company that was, and now it’s just like, I have no clue anymore what’s going on because it’s so hard to stay interested in the energy sector.

So what about minerals?

Tina Byers:   Minerals, we’ve been looking at some of the base metals. This past year they haven’t been performing that well. It’s interesting to look at some of the charts for the base metals, because you can see when Trump got into office, the base metals actually performed quite well because of all of his infrastructure promises. And then I guess between the China trade talks, all of that, all of those gains were basically washed away.

So I think this year is kind of another time to start taking a look at that again, but it’s definitely been hard on some of the mining companies as well.

James West:   Yes. Would you agree with this sort of general idea that there is an imminent convergence between supply and available – or available supply and demand for certain minerals like zinc, copper especially, certainly uranium is starting to look like it’s catching a bid, and, I mean, it looks to me like there could be a broad, you know, return to resources in the, I don’t know, I’m not going to say when, obviously, but at some point in the near future, it looks like it’s their turn.

Tina Byers:   Yeah. It’ll be interesting to see what happens in the space. Like even some of the industrial metals, like iron ore’s been a really strong outperformer. I think some of them could have their chance, but it’ll be tough in this market if the cannabis, if cannabis catches a bid again – because that’s just where the retail, it’s easy to understand, and that’s where the retail is moving right now, so.

James West:   Do you think that the weakness in commodities or resource sector and tech sector and biotech sector is largely a result of the absolute mania that’s engulfed the cannabis space currently?

Tina Byers:   I think so. Like, you’ve seen such great performance from these cannabis companies, so if you’re going to allocate your money somewhere, it seems like, to a certain extent, there’s less risk by putting it into a cannabis stock and seeing it pop two or three times kind of on the open, whereas the mining sector is much slower moving, and it could take some time to see some of those results. And the uncertainty of the pricing is not really driving investors towards that space right now.

James West:   Right. Right. The events that would be required to really drive interest into resources broadly across the Canadian investor landscape, do you think one of those would have to be a downturn in the cannabis sector to the point where people started to lose interest and started to look for an alternative, believing that the bloom had finally come off the rose in cannabis? Or do you think that that’s really not a realistic expectation, given the fact that we’re still at the front end of a global revolution in cannabis, sort of availability and regulation.

Tina Byers:   I think some of the money will have to roll out of that space in order for the resources to catch a bid. There’s a lot of uncertainty still around the trade wars and what’s happening in Alberta for energy pricing, so I think once some of that gets cleared up a little bit, there could be more interest.

But really it’ll be interesting to see what happens in the cannabis space this year. I think when we get towards October, when edibles are starting to become a part of the Canadian market, I think some of the names could catch a bid then as well. But on a quarterly basis, when we see the financials of these cannabis names, it could also affect some of the numbers to the downside on performance that way, so.

James West:   Do you get a sense at all that the cannabis supply of grown cannabis is going to be reaching a state of oversupply soon as a result of the continuing explosion of cannabis companies in both North America and elsewhere in the world now more so?

Tina Byers:   It’s hard to say right now, because there’s so many companies that are popping up, and they all claim that they’re going to be sold out of product immediately. And I can see the demand; if you look at the United States, there is quite a bit of demand. One of the other things that is playing a role in the supply/demand imbalance is just the quality control of some of these companies. They’re going through the QA/QC process, and a lot of the product isn’t passing the quality. So it’s not necessarily a reflection of how much the companies are producing, but how much is actually getting past the quality controls.

James West:   So is that, then, responsible, in part, for the shortage of cannabis products in the online cannabis stores run by governments, is that they’ve got this huge supply, it gets to the quality testing phase, and only a fraction of that gets through?

Tina Byers:   I think that’s part of it. I think Health Canada’s been very slow, I guess, in terms of how many skus they’ll allow the market. So there’s a couple of larger companies that have dozens of skus, but they’re only allowed to put through a couple on the OCS website or so, like, some of the dispensaries. So I think that’s also been a bit of an issue.

James West:   Right. In terms of the cannabis opportunities in Europe versus the United States – so there’s a large chorus of analysts recommending that Canadians or investors everywhere should be now looking to the US MSOs as a better value for investors now, given their state of evolution they’re at relative to the Canadian landscape. And I’m always wondering, well, what about the European landscape? The European landscape is obviously a much bigger market than even the United States in its entirety; well, at least somewhat bigger. And mostly it’s only the Canadians, really, who are able to service the European opportunity. So I listen to that sort of argument from the analysts, usually coming from banks that are financing the US MSOs, so therefore their compelling logic, is, you know, there for a reason.

But do you see that as any kind of, like, do you agree with that? Do you think that’s true, or do you think there’s still a lot more value in the MSOs to be unlocked in the US?

Tina Byers:   I think it’s a good point in terms of exporting to Europe; there’s definitely a good opportunity there. I think Canada will start to see more competition. It’s still really early, so they definitely have a leg up and some of the companies that have been able to get financing can definitely grow at a more rapid pace than their US competitors at this point, who are starting to get more financing, mostly through Canadian investors. But there is that opportunity in Europe that the US companies don’t necessarily have, although I think right now, in terms of the multiples that they’re trading at, the US seems to be quite cheap in comparison.

James West:   All right, Tina, well that’s a great initial interview with you. I’m so glad to finally have you on the show.

Tina Byers:   Yeah!

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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