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What a $700-million fund manager is buying and selling in the Canadian cannabis sector

Part of cannabis and investing

Marijuana stocks are volatile and many have sky-high valuations. While that is scaring away some investors, others, such as Charles Taerk of Faircourt Asset Management Inc., are sorting through cannabis companies and picking the players they think will perform best.

“There’s a really wide range of valuations in the sector. Some companies get premium valuations. Some are justified and others are diamonds in the rough where we feel they are operating quite effectively but just not getting attention,” says the president and chief executive of Faircourt, which manages more than $700-million assets and is a sub-adviser to Ninepoint Partners LP. Its three main funds are the Faircourt Split Trust, which includes North American equities; the Faircourt Gold Income Corp., which is focused on the precious metals sector; and the newest – where Faircourt is portfolio adviser – the Ninepoint-UIT Alternative Health Fund. The latter includes various marijuana stocks and companies such as Savaria Corp., Jamieson Wellness Inc. and Vocera Communications Inc. As of June 30, the UIT (“unique investment themes”) fund has returned 40.9 per cent since it started in March, 2017, seen a 65.5-per-cent return over the past year and 9.4 per cent year-to-date. The Globe and Mail recently spoke with Mr. Taerk about the companies he’s been buying and selling.

What concerns are you hearing from investors today?

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In the [cannabis sector], the concerns are valuations. Some people believe that all of the companies are overvalued. We try to explain to investors that it’s not a homogeneous group. We are doing a lot of due diligence: visiting facilities and interviewing management teams. Valuations are something people like to get educated on. There are also questions about government regulation at the federal and provincial level as we approach [legalization of recreational cannabis in Canada] Oct. 17.

What’s your take on the broader markets today?

In our North American equities funds, we tend to be overweight some U.S. names, as well as Canadian securities that have good exposure to the U.S. We are 10 years into the current bull market, but the U.S. tax cuts have provided that market with a great tailwind. Although we don’t love everything [U.S. President Donald Trump] says and does, the tax cuts have helped. Creating protectionist measures, for America, with the tax cuts, leads to more American companies spending more money in the U.S. The economy, for the short term, is healthy. Despite the erratic tweets from the President, from an economic standpoint, those few policies seem to be working. Down the road do trade tariffs work? No. Trade barriers are going to hurt the global economy, which is why we have a gold fund. Gold is an insurance policy.

What's your take on where the markets are heading in the short term?

I think short-term, U.S. markets will remain pretty strong. We are into another earnings season and continue to see positive earnings growth with a lot of the S&P 500 companies. The Canadian economic picture is more clouded. Because of reliance on trade and concerns we have about the status of the North American free-trade agreement, there are significant worries. We as Canadians have ridden a wave of increased debt to fund our consumption patterns, whether it’s real estate or credit cards. The economy is now slowing down a bit. That, combined with any trade pressure, could affect our economy negatively, particular in places like Ontario with the auto sector.

What have you been buying lately?

In the cannabis sector, we have been adding more OrganiGram and Aphria, and have been looking at U.S. names. The political situation in the U.S. [where cannabis is still illegal at the federal level but legal in many states] is changing dramatically, and we are reviewing many opportunities in that country. A company that is very interesting to us is Stanley Brothers, a cultivator of CBD [cannabidiol] from industrial hemp. Charlotte’s Web is their primary brand, focused on CBD oils in the treatment of many ailments including seizures in children with epilepsy. They generated US$40-million in revenues and had net income of US$7.5-million in 2017. Hemp and marijuana are legally distinct by definition as hemp contains less than 0.3-per-cent THC [tetrahydrocannabinol] on a dry weight basis, not sufficient to create a psychoactive effect.

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What about other sectors?

We like the rails. They are the lifeblood of the North American economy and have extensive business exposure in the U.S. We own both Canadian National Railway and Canadian Pacific Railway. We have been adding CP Rail lately because the pricing has been a better opportunity for entry.

What have you been selling?

We’ve sold MedReleaf, which will become part of Aurora Cannabis soon. We really liked MedReleaf. They were one of our largest holdings [in the fund]. We don’t have the same appreciation for Aurora. We have some operational concerns following a recent visit to the Aurora Sky facility [under construction in Edmonton]. They have also made two major acquisitions — CanniMed and MedReleaf — and haven’t really made public disclosure about where the synergies or integration are with any of these deals. Also, the MedReleaf deal was an all-stock deal with no lock-up [an agreement whereby shareholders are prohibited from selling their stock for a set time]. We think there will be some downward pressure.

We also recently sold Tilray Inc. We got an allocation for the IPO, which was at $17, and in two or three days it went over $30. Nothing against it, but when you have that quick of a gain, you take profit and you wait for the next one. This is an early-stage sector. There will be another time to own it.

What's the one stock you wish you bought?

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We didn’t buy into OrganiGram early enough. We bought it last fall in the low $3 range. It would have been great to have owned it earlier. [The stock is currently trading around $4.50.]

This interview has been edited and condensed.

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