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HMMJ Rebalance: 10 New Stocks Added in Q2

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BY MARK NOBLE, SENIOR VICE-PRESIDENT, ETF STRATEGY, HORIZONS ETFS

April 4, 2018

When the Horizons Marijuana Life Sciences Index ETF (“HMMJ” or the “ETF”) was launched in the spring of 2017, there were 16 stocks in the portfolio. As of its most recent rebalance, completed on March 16, 2018, there are 37 stocks in the ETF portfolio.

This metric alone underscores the dramatic growth of the Marijuana equity sector in the past year. HMMJ is an index strategy that seeks to replicate the performance of the North American Marijuana Index (the “Index”). In order to qualify for inclusion in the Index, stocks must have significant interests in the legal marijuana business and must meet minimum market capitalization and trading volume requirements.

The Marijuana Industry Grows

The fact that the number of securities in the HMMJ portfolio has more than doubled in less than a year directly correlates with the growth of the market capitalization of the companies in the marijuana sector. 
Another interesting statistic is the shear growth of marijuana-producing companies in Canada. In order for a company to be legally allowed to cultivate and distribute marijuana, they need to go through a rigorous Health Canada licensing process under the Access to Cannabis for Medical Purposes Regulations (“ACMPR”).

When HMMJ launched in April of 2017, there were 40 companies with ACMPR licenses to grow Cannabis in Canada. By March of 2018, there were 93 – more than double the previous year. This underscores how quickly the industry is growing and how robust the outlook for demand is expected to be, particularly when considering recreational marijuana usage is expected to be made fully legal in the latter half of this year. 
Despite these positive indicators, it is important to consider potential negatives; including the fact that it is highly unlikely that all of these companies are going to be successful. Like any other industry, there will be winners and losers in the marijuana market. Typically, the market favours early entrants.

Scale Matters

Indeed, one of the reasons that Canada has taken a pole position in the global marijuana industry is because our legal medical marijuana framework was established earlier than other developed nations. Furthermore, many of the early ACMPR licensees were able to get public stock listings that allowed them to get a leg-up on capital markets and financing.

It may be very difficult for new licensees to compete with the scale of the bigger producers who can utilize external financing to expand and consolidate within the industry. This underscores the appeal of HMMJ, in that the Index imposes a $75 million market cap on its constituents, so the ETF is only holding the higher-tier names which have access to larger pools of capital.

Regardless of size, many of the publicly listed marijuana companies are trading at what many regard as high valuations, while many of the larger producers have negative earnings. Those that have positive earnings are trading at extremely high price-to-earnings (“P/E”) ratios, like Aphria Inc.’s 340:1, according to Bloomberg as at March 16, 2018.

These P/E ratios are being supported by significant sales growth. In the same example of Aphria, the company has seen a growth rate in sales of 214% (for the 12-month period ending February 28, 2018, according to Bloomberg), even before the potential recreational marijuana opportunity presents itself. Indeed, the average sales growth for the Index was roughly 50% over the last 12 months, according to Bloomberg.

Companies that are establishing robust distribution networks are also building infrastructure to be leaders in recreational marijuana distribution domestically, and in some cases, expanding to overseas markets such as Germany. The valuations of these stocks are being driven by this earnings potential, which really cannot be quantified yet.

Other Key Highlights

Performance
The Index was down year-to-date at about -7.8% as at February 28, 2018. However, on a six-month basis, the Index is up more than 93%. This last quarter has witnessed a pause in what had been an explosive growth in performance over the last year.  

Big Pharma Enters the Space
Tilray, which is among the largest marijuana companies that is not publicly listed, announced on March 19, 2018, that it had signed a binding letter of intent with Sandoz Canada, and affiliate pharmaceutical giant Novartis AG. Under this agreement, Tilray will develop non-smokable marijuana pharmaceuticals that Sandoz will distribute.

Since Tilray is private, this isn’t immediately reflected in the sector’s stock prices. However, it’s a huge development for the nascent marijuana industry because, until now, the big pharmaceutical giants had steered clear of investing directly in the medical marijuana market.

As with the large pharmaceuticals, the marijuana industry may also prove to be attractive to alcohol and tobacco companies, which could represent another significant pool of capital for substantial investment into the space.

U.S. Listings
Canadian marijuana producers have also seen another opportunity for further capital markets funding through cross-listing on U.S. stock exchanges. Cronos was listed on the NASDAQ stock exchange on February 27, 2018. A week later, Canopy, the largest marijuana producer in Canada, mentioned it was looking at a similar dual-listing. A U.S. listing creates a much larger investment pool for these stocks, as buying Canadian-listed/foreign securities are an operational challenge for many U.S. investors.  

New Additions to HMMJ

In order to be included in the Index, a stock must have a market capitalization of at least CAD $75 million and an average monthly trading volume of 250,000 shares per day. Given the rapid ascent of the marijuana sector as a whole, it’s no surprise that a lot more stocks became eligible for inclusion in the Index, and by extension, HMMJ, during the quarter.

The Index added 10 new stocks at its recent rebalance. They are:

Constituent Name Ticker Exchange
Abattis Bioceuticals Corp. ATT Canadian Securities Exchange
Beleave Inc. BE Canadian Securities Exchange
Hiku Brands Co. Ltd. HIKU Canadian Securities Exchange
Isodiol International Inc. ISOL Canadian Securities Exchange
National Access Cannabis Corp. NAC TSX Venture Exchange
Neptune Technologies and Bioressources Inc. NEPT Toronto Stock Exchange
Nuuvera Inc. NUU TSX Venture Exchange
Tetra Bio-Pharma Inc. TBP Canadian Securities Exchange
Terrascend Corp. TER Canadian Securities Exchange
THC Biomed International Ltd. THC Canadian Securities Exchange

 

Abattis Bioceuticals Corp.
Abattis Bioceuticals Corp. is a specialty life sciences and biotechnology company. Through its operations and wholly owned subsidiaries, the company has a broad range of capabilities including cultivating, licensing and marketing proprietary ingredients, bio-similar compounds, patented equipment and consulting services to medicinal marijuana markets in North America. Abbatis has a 49% stake in a CannaNUMUS Blockchain, a technology company that focuses on developing blockchain solutions for marijuana distribution.

Beleave Inc.
Beleave Inc. is a biotech company and its wholly-owned subsidiary, Beleave Kannabis Corp. (formerly First Access Medical Inc.), is a licensed producer of marijuana pursuant to the ACMPR. Beleave has a marijuana production facility located in Hamilton, Ontario. One of the company’s specialties is the production of cannabis oils.

Hiku Brands Co. Ltd.
Hiku is focused on building a portfolio of iconic, engaging cannabis brands, immersive retail experiences and handcrafted cannabis production. Hiku’s wholly-owned subsidiary, DOJA Cannabis Ltd., is a federally licensed producer pursuant to the ACMPR, owning two production facilities in the heart of British Columbia’s Okanagan Valley. The company operates a network of retail stores selling coffee, clothing and curated accessories, across British Columbia, Alberta and Ontario. Hiku has entered into supply partnerships with Aphria Inc. (TSX: APH) (OTCQB: APHQF) and WeedMD Inc. (TSXV: WMD) to ensure Hiku’s brands will be able to scale in 2018 and beyond.

Isodiol International Inc.
Isodiol has been the industry leader in the manufacturing and development of raw ingredients and consumer products derived from cannabis. Isodiol is focused on the nutritional health benefits derived from hemp and is a product development, sales, marketing and distribution company of hemp-based consumer products and solutions. The company specializes in identifying emerging trends and opportunities from all cannabinoids available in hemp. The company’s growth strategy includes the development of over-the-counter and pharmaceutical drugs, and expanding its phytoceutical (meaning medicines/drugs derived from plants and herbs) portfolio.

TerrAscend Corp.
TerraAscend is a Canadian-based company focused on creating and delivering quality cannabis products and services. It provides support to patients through its subsidiaries, Solace Health Inc. (“Solace Health”), a licensed producer of medical cannabis. Terra Health Network Inc. (“Terra Health”), a clinical support program and education platform led by health care professionals and SolaceRx, a proposed drug preparation premises for the compounding of non-cannabis formulations for a variety of institutions. Solace Health, a wholly owned subsidiary of TerrAscend, is licensed to cultivate cannabis under Health Canada's ACMPR. It has a 67,300 square-foot production facility. In November of 2017, Solace Health completed its second harvest and has submitted its application for a license to sell cannabis pursuant to the ACMPR.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

The financial instrument is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade name or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade name for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.

Certain statements may constitute a forward looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

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