The stock market has clearly been favoring the Canadian licensed producers (LP) over the U.S. multi-state operators (MSO). This is evident by the massive stock price rise in Canadian names. In this interview, Faircourt Asset Management CEO and Ninepoint Alternative Health Fund Manager Charles Taerk makes a strong case as to why the U.S. players will actually have a significant economic moat and will provide shareholders a lot more value moving forward.
An economic moat is a business’s ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.
Almost a year ago to the day, the world entered its first lockdown arising from the pandemic. One of the first results after this was the ruling by 29 states that cannabis is an essential service. This declaration reinvigorated the cannabis industry and wakened investors to the high demand for the green commodity. Such inelastic demand is similar to alcohol or tobacco. (Translation: no matter the change in price, people still want the marijuana)
As stimulus checks were distributed around America in April 2020, people cashed out and headed to their local weed shop – resulting in the largest one-day cannabis sales. As lockdowns ended around June, the demand kept continuing to grow month-over-month, state-over-state.
As elections rolled around, we not only received future promises of de-prohibition reform, but five states also legalized – perhaps the most significant being New Jersey. New Jersey is seen to be a domino state as the surrounding areas could also follow suit. We are already seeing it in Maryland and New York.
With these events, certain U.S. MSOs have extremely attractive valuations – especially when compares to other growth sectors like tech, which are trading at significantly higher valuations.
Even with the lack of regulatory action from the Biden administration, Taerk argues that rather than this being detrimental to MSO valuations, it actually supports the incumbent players as they continue to build a moat around their business. Canadian, international, alcohol and pharmaceutical companies will not be able to access the market allowing the top players in the MSO to continue developing their stellar businesses.
Just looking at the free cash flows comparatively between the U.S. MSOs and Canadian L.P.s, we see stark differences. The top five Canadian cannabis stocks have reported $0 profitability, whereas the top five U.S. names have already forecasted $1.5 billion for 2021.
As the Ninepoint Alternative Health Fund team clearly have their finger on the pulse of all things cannabis, it’s not surprising their fund returned unitholders between 37 and 40% returns over 2020 – being able to maintain its net asset value (NAV) over the weak period of the year and accelerating through the balance of 2020.
“We try to skate where the puck is going” – Charles Taerk, Faircourt Asset Management CEO
Watch the full interview for a masterclass in cannabis investing and the weed stocks the fund sees as being top performers this year.