We invite you to read Paul Beattie’s piece in the MoneyTalks Special Report – Investment Opportunities & Pitfalls for the Rest of 2019
Cannabis & Health Care
There are two investment themes we at BT Global would like to share with you this month: US Cannabis equities and Canadian healthcare stocks.
If you are looking for outsized returns with limited downside you need look no further than the following few pages. We stand behind these ideas as the two sectors each represent a maximum position of (net) 20% exposure in our Fund.
Let’s talk CBD and Cannabis opportunities in the US. This situation is simply absurd. The market is much bigger in the US, while the number of companies and their corresponding market caps are far larger in Canada. It doesn’t make sense and will not last. Our friends at Green Thumb Industries (GTII, great stock and a buy), put out a slide the other day at an investor day in Toronto which simply says it all.
We would recommend buying all the larger Multi- State Operator stocks Curaleaf Holdings, Cresco Labs, GTII, Harvest, Cannex, Ianthus, INDUS Holdings etc. and simply watch what happens as the market opens up south of the border.
We could go on and on about the additional long term advantages the American companies have over our Canadian players, including cheaper valuations, lower multiples, bigger markets, better margins, superior management talent etc. But the real sustainable and key asset they have is the ability to build brands. The Canadian Government views cannabis much like cigarettes and the freedom to develop a real brand is drastically reduced. In the US the best and biggest brands will emerge with few restrictions and this will ultimately hand the economic benefit to US cannabis shareholders. Our government has it wrong (again!) and their policies will eventually cripple the Canadian cannabis industry.
As investors we need to be aware and we need to react. Fortunately, all of these US based companies are listed here in Canada and we have the opportunity to get to know the management teams and invest in the best companies before they list in the US. If you don’t have time to look at individual names, perhaps you could simply buy the Horizon US Cannabis ETF (HMUS). We think this fund will perform very well over the next 18 months, basically until Mr. Trump is tossed out or re-elected.
The next big play is Canadian Healthcare. More specifically we like the companies that are listed in Canada but have the majority of their business in the US. Often these stocks trade at a significant discount to the multiples on US stock exchanges. There are not many such opportunities but there are a few.
Viemed Healthcare Inc. (VMD.to) is our top pick and trades at an unusually low EBITDA multiple of approximately 7x 2020 estimated EBITDA versus US comps at 12 x or more. The company published very good results recently and the stock is close to all-time highs. This is understandable in our opinion and Viemed should continue to do well in the markets for many reasons. They have no debt, are growing organically at between 35-45% per annum and are number one at what they do in America. The company treats people that suffer from Chronic Obstructive Pulmonary Disease (COPD). How big is this health issue? Unfortunately, it is huge. It represents the third largest killer in the US, after cancer and heart disease. They are an industry leader in providing equipment and services across more than 30 states and actually reduce the healthcare costs for their clients. How long can it remain one of the cheapest healthcare stocks in North America? If it were to trade only in Canada, probably a while, although the discount would certainly narrow over time. The reality is that the company is going to list in the US sometime this year which we believe will only be very good news for shareholders.
When it comes to macro calls we find ourselves a bit less confident. It is hard to predict with great conviction where things are going over the next 6-12 months with Mr. Trump in the oval office. Regarding interest rates we would suggest the Fed is going to keep rates low for years. The US dollar is the “king of the midgets” and has performed admirably well recently, mostly because other currencies including the Euro and Canadian dollar are worse places for your capital. Our view is the US dollar will be relatively range bound. We also believe a trade deal will get signed between the US and China and markets will bounce and then move on to worry about something else.
Few people expected the equity markets to rebound this well in 2019 and it has certainly been a good year for returns thus far. We were fully invested until recently and expect the equity markets to have a pause here, perhaps over the summer, and yet trend higher into the fall and next year. In our opinion, the US elections next year should ensure stable and rising equity markets.
If you have any questions about our investment fund or our investment philosophy, we invite you to contact us today. It will be our pleasure to answer your questions.