Horizons ETFs Management (Canada) Inc CEO on Cannabis Sector Catalysts

Horizons ETFs Management (Canada) Inc President and CEO Steven Hawkins provides his take on the current state of the cannabis market. Hawkins is still bullish about cannabis stocks and believes the recent Altria Inc (NYSE:MO)-Cronos Group Inc (TSE:CRON) (NASDAQ:CRON) (FRA:7CI) deal is just one of many potential industry catalysts; however, he also notes that equity markets are currently extremely volatile. Hawkins describes the performance of the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) (OTCMKTS:HMLSF), which Horizons ETFs Management launched last year. He notes that while the ETF is down 15 percent since October, it slightly outperformed the top five Canadian cannabis companies, and remains a viable option for investors looking to enter the space. Hawkins praises the Canadian Securities Exchange for becoming the “cannabis exchange of the world.”

Transcript:

James West:   Welcome back. My guest this segment is Steve Hawkins, CEO of Horizons ETF Canada. Steve, welcome back.

Steven Hawkins:    James, thank you for having me.

James West:   Steve, the cannabis market has been a bit of a disappointment lately, I think we can all agree, and tax loss selling notwithstanding, there’s been some negative developments. A bunch of short strategists have come out with some pretty ugly reporting against Aphria and Liberty Health Sciences, and at the same time we saw Cronos do that deal with Altria for $2.4 billion transaction that you would have thought would have resulted in more upside.

So what is the cause of all of this negativity?

Steven Hawkins:    I mean, a lot of it is just the general market sentiment, what’s going on right now. I mean, it’s not just tax loss selling; the equity markets are extremely volatile right now, and we’re seeing severe downticks in the S&P 500; on Thursday or Friday last week, notwithstanding, marijuana stocks were generally up.

You know, when the market is quiet and on a steady roll up, people – there’s not a lot of news which is happening, there’s not a lot of developments in the marijuana space, and we’re seeing things tick down because of the high valuations that are already existing. But you know, it’s general market movements are not good for marijuana stocks right now. Positive news, like the Cronos/Altria deal, is very, very positive.

James West:   But yet, the market, there was no uptake. Is that because all of this negativity has sort of put a paralyzing effect on investor sentiment?

Steven Hawkins:    I think that’s one, especially at this time of the year as well, people are trying to understand what is going on with their money. It’s interesting, though, because last year was a complete reversal. We had very similar news which came out like at the end of November, sort of December last year, and we saw a huge wave of money wash into marijuana companies going through December and early January last year, whereas the regular stock market was going down the whole time.

So you know, it was a complete market reversal. I mean, the nice thing about the Altria-Cronos deal is so that, that’s one shoe that’s dropped. What’s going to happen next? We have Phillip Morris, we have Imperial, you know, these companies have to make moves into the space. They can’t sit back and just wait for the marijuana companies to continue to eat their lunch.

James West:   Sure.

Steven Hawkins:    And that’s just Big Tobacco. What is Big Pharma going to do? You know? We see the Shoppers Drug Mart deal; being able to sell online. I mean, these are all things which are going to be very, very positive for the marijuana market going forward.

James West:   So it sounds like you’re long-term bullish, short term bearish?

Steven Hawkins:    Right now, I’m actually – I’ve said that’s probably a pretty good sentiment. I’m actually in the process of, you know, I think that we’re going to see some consolidation at this level from a price perspective, and we’re probably going to stay in a little bit of a range until we get another nice piece of news which will break us out. So right now, I’m probably in the process of buying a little bit more in the cannabis space. But I’m still long-term bullish, absolutely.

James West:   Right. So then how does the Horizons ETF deal with this kind of negativity? How do you perform?

Steven Hawkins:    Well, over the past month, most of the marijuana companies were down pretty sizably. I mean, we had Aphria down 60 percent in the past month; Aurora, WEED down 20 percent in the past month. But you see Cronos up 50 percent, and then you see Tilray down maybe 10 percent. You know? The Horizons Marijuana Life Sciences ETF was down 15 percent over the past month. On a relative basis, if you took 20 percent of each of those five companies, Aurora, Aphria, Cronos, Tilray and Canopy, we slightly outperformed that basket of five stocks.

But are people out there owning those five stocks? Generally not, right? They’re taking bets on one or two, and if you bet on Aphria, you got the crap beat out of you, and there are not a lot of people that owned Cronos to the same degree, right, in Canada, anyway.

So you know, WEED and Aurora stood in reasonably nicely, but they were still down, you know, almost 20 percent over the past month.

James West:   Sure.

Steven Hawkins:    So for us, again, owning a diversified basket of cannabis companies, we believe, is the most important way to get access to the space, simply because you don’t want to be taking these individual bets. You don’t want to have one company where you just lost 60 percent and you didn’t own the company that was up 50 percent, right?

James West:   Right. Huh. So do you position yourself, are you positioning yourself right now, more for exposure to the US market at all, or are you still focused mostly on Canada, or what combination of?

Steven Hawkins:    We’re, in HMMJ we’re primarily focused on the Canadian market only. We can’t really invest in companies that have US operations, so the MedMens and things like that are not in our primary portfolio. They’re in our index, but we can’t invest in them, because we want to maintain our TSX listing, and these are the same rules that apply to Canopy, Aurora, Aphria, anybody who’s listed on the Toronto Stock Exchange, really has to follow the guidelines of the TSX – which means no US production, cultivation, distribution, exposure in your portfolio.

But that said, you know, there’s lots of new product ideas that are coming out there where we want to invest in US companies. And you know, down the road, I mean, we’ve seen such a proliferation of the US companies coming to Canada, now. CSE had I don’t know how many, I think there’s 45 listings of US companies in Canada right now on the CSE, and we see that as the primary driver of the capital markets for the US companies in raising capital; they’re coming to Canada. They’re listing here in Canada, and the CSE is doing a great job of becoming, you know, the cannabis Exchange of the world sort of thing, whereas, you know, the TMX has got their own rules.

And we see a lot more opportunity potentially down the road for US companies. So you know, as an ETF provider, you know, we’re looking to bring product to marketplace that people want where there is potential for, you know, increased exposure down the road. We can’t put US exposure on our primary product, so do we want to create a second product or a third product that is going to provide only exposure to the US where we see, on an overall valuations perspective, significant more ability for gains to be had on a relative basis?

We have these high valuations in Canada, and we have, for whatever, reason, lower valuations out of the US companies, because they’re not as well known here, right?

James West:   Right. There’s been a few IPOs that have come to the market recently that were typically billion-dollar IPOs, governed by super-voting structures where a couple of insiders control the whole thing for all intents and purposes, and the last few of them have really sort of discounted right off the hop from their IPO price. Do you think that’s having a chilling effect on the cannabis space generally, as well?

Steven Hawkins:    A little bit, for sure. I mean, and you know, a lot of that again is because the US market doesn’t have access from a regulatory perspective to the Canadian equity marketplace the same way that Americans can buy US companies listed on the US Exchanges, right? So Canadians can easily buy any Canadian stock, any US stock; Americans can’t necessarily buy Canadian companies the exact same way.

So, very, very different trading atmospheres for all parts of the people that want access to the market, from the direct investors, the retail advisors, to the institutional investors. So that creates regulatory arbitrage from a cross-border perspective, and creates more difficult from a capital markets perspective.

And so you see these nice IPOs come out in Canada, but again, there’s just a general overall calmness to the market or, you know, coldness to the market, as you said. And so these IPOs are coming out, and there’s always, typically when you see big companies like Facebook, you know, when it went IPO, there’s a retracement, because there’s a big controlling group of shareholders, there’s a market value where it got priced at an IPO perspective, and you see a pullback.

And what happens after that? You see people consolidating, and you see people move money into the marketplace, and you see there’s not lots of new prospects. But it’s not like every IPO that’s going to come out is going to be hot off the newsprint and going to shoot the lights out, you know? It’s not Tilray, anymore.

James West:   Right. So do you think in 2019 investors have to be cognizant of the fact that there’s an increasing availability of product, but the quality level might be going down a little, so you might need to be a little more focused on fundamentals?

Steven Hawkins:    Absolutely, that is the case. You know, before there was only 15 issuers that you could buy; now there’s 100-plus issuers that you can buy, right? So being diversified from an exposure perspective is very, very important, and you’re going to have to do your homework if you want to get into this space.

James West:   You bet. All right, Steve, I appreciate your insight as usual. That was great. We’ll come back to you in due course; thanks for joining me today.

Steven Hawkins:    Thanks for having us.

Original article: Horizons ETFs Management (Canada) Inc CEO on Cannabis Sector Catalysts

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