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Horizons Marijuana Life Sciences Index set to be country’s second most profitable ETF

The world’s first cannabis exchange traded fund is set to become the second most profitable ETF in Canada after returning more than 50 per cent so far this year.

The Horizons Marijuana Life Sciences Index fund has grown to $1.3bn in assets despite some outflows this year, making it the 18th largest Canadian ETF, according to data provider ETFGI.

Its high management charge and ability to recoup large fees from lending stock mean it is fast catching the country’s most profitable ETF, which is more than five times its size.

The growth of the Horizons ETF highlights the popularity of thematic ETFs, particularly the handful that focus on the nascent legal marijuana industry in North America.

“There is high demand for these products without much supply, which allows the managers to charge a premium and be almost immune to the fee pressure that is widespread across the industry,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA, a research company.

The Horizons ETF charges 75 basis points, or 75 cents for every $100 invested, which is several times the typical charge on a more general product. By contrast, the $7bn iShares S&P/TSX 60 Index ETF, Canada’s biggest, charges 20bp.

Mr Rosenbluth said he knew of just one cannabis ETF in the US, the $1.1bn ETFMG Alternative Harvest ETF, known by its ticker as MJ. He said several managers had applied to the Securities and Exchange Commission, the US regulator, to create similar products.

He said the hardest part of launching such funds was finding a custodian as although marijuana production is legal in several states, it is not legal at federal level. Many banks were hesitant to be associated with such products.

Canada last year became the second country in the world, after Uruguay, to legalise recreational cannabis use. Ten US states and Washington DC have legalised the drug for recreational use and 32 for medical use. In December, the US passed a bill that legalised hemp and allowed growers to qualify for crop insurance and research grants.

Cannabis ETFs, which track indices of companies with significant activity in the marijuana industry, have had a rollercoaster ride.

For the Horizons fund, a $10,000 investment made at its launch in May 2017 was worth $25,750 at the end of last September but dropped to $15,494 at the end of December. The fund has since returned 52 per cent.

“When we launched the fund we had no expectation of how big it would get,” said Steve Hawkins, chief executive of Horizons ETFs. “I would probably have priced it higher if I had known how big it would be.”

He said the ETF’s investee companies were in demand from short sellers and Horizons generated up to 10 per cent of the ETF’s yield by stock lending. He said this revenue was distributed to investors.

Hedi Slimane’s Saint Laurent has left the building. And with it, the strung-out or merely pouty disaffected youth who formed the core of his work for that house. She crossed over to Celine with him, a little less angry, but similarly attired — short, tight, black and, when she lost the gray cloud, trashy-sexy. She’s now gone, and good riddance.

On Saturday night, Slimane introduced Celine’s new woman, and she is a woman — chic, knowing, and a direct descendant of a particular stylish archetype of years past. In a little fashion irony, Slimane always installs a modernist set. This time, his first model descended from on high in a big light box, emerging onto the runway in all her retro glory. Her look: the sort of confident, sporty élan that ruled bourgeois Parisian style, and emanated well beyond that sphere, in that well-dressed period from the mid-Seventies into the Eighties, before the latter decade turned hideous. The aura travels well, across time and through modern life.

As usual, Slimane employed a laser-sharp focus. His primary message: a great, often mannish jacket atop an easy skirt or some variation of culottes, some full enough to be called, in the language of old, a split skirt, others streamlined into walking shorts. There were also pretty waisted dresses in unfussy prints, including the classic Celine chain motif. Apart from the silks, the fabrics were substantial as befits traditional autumn dressing, often from men’s wear, and the palette, neutral with touches of golden glitz.

It all looked very strong and very Celine. Slimane clearly immersed himself in the house archive, where he discovered a new comfort zone, one light years away from the tawdry cool of his recent creative past. Familiar though the look was in an historical sense, Slimane made it feel fresh (even if the show ran a bit long). One could imagine his models walking out into the street, their casual polish calculated to be noticed while projecting an off-handed attitude.

The message was straightforward and in its way simple – jacket, blouse, skirt, dress that works under a jacket and, for the wardrobe’s sake, a pair of jeans, all finished with a reasonably sized shoulder bag with logo hardware and a high boot, whether heel or wedge.

This is where Slimane’s consistency from his Saint Laurent days showed through. Some designers need relentless merchandisers to translate their runway collections. For some merchandisers, it’s a grueling task. Slimane is himself a brilliant merchandiser, probably one of the most commercially savvy designers working today. Rather than declining runway for reality, he works in the reverse, reshaping reality for the runway. As shown, this was a collection that, item by item, is full-on retail ready with a wealth of impressive items. Will it play as well as the work from his Saint Laurent past? Here’s hoping. The world could use a dose of bourgeois chic.

Industry star Kraft Heinz recently served up weak results with an unsavory stew of announcements, including a dividend cut and a write-down of the Kraft and Oscar Mayer trademarks, sending its stock (ticker: KHC) down 27% in a day. This past week, Campbell Soup (CPB) and J.M. Smucker (SJM) reported quarterly financial results that pleased investors and their shares leaped 10% and 5%, respectively.

Those recent results offer comfort that not all of Big Food is getting Heinz-ed, but investors shouldn’t step up to buy before separating fact from folly in the food aisle.

On the plus side, stock prices have gotten much more appealing. A basket of nine major U.S. food makers tracked by FactSet has fallen 30% in price over the last two years. A few years ago, before the Federal Reserve turned earnest on interest rate increases, this group traded above 20 times projected earnings, a premium at the time of more than 30% to the broad U.S. stock market. Now, the nine fetch 14.8 times earnings, a 10% discount. The Fed, meanwhile, has paused on rate increases, which could bring dividend hunters out from hiding. FactSet’s food basket pays a hearty 4%.

But food stocks can no longer be called defensive, as long as wild price swings abound. Kraft’s woes have been blamed on cost-cutting at the expense of investment in innovation, but that is a symptom. The underlying cause is that once-steady growth has been disrupted by profound, durable changes in how consumers buy food.

Cheap, But Are They Tasty?

Valuations for many U.S. food companies have come down. Some face more portfolio challenges than others.

Company / Ticker Recent Price Mkt Val (bil) Forward P/E Div Yld Portfolio: Good Portfolio: Stable Portfolio: Challenged

B&G Foods / BGS $24.28 $1.6 12.8 7.8% 40% 22% 34%

Campbell Soup / CPB 36.21 10.9 14.4 3.9 33 30 31

Conagra Brands / CAG 23.09 11.2 10.7 3.7 33 40 27

General Mills / GIS 47.09 28.1 14.7 4.2 12 37 38

Hershey / HSY 109.58 22.2 19.3 2.6 43 31 14

Hormel Foods / HRL 42.91 22.9 23.1 2.0 68 9 20

J.M. Smucker / SJM 107.57 12.2 13.0 3.2 34 25 43

Kellogg / K 55.76 19.2 13.9 4.0 17 16 50

Kraft Heinz / KHC 32.20 39.3 11.2 5.0 17 38 40

McCormick / MKC 134.75 17.8 25.3 1.7 54 35 11

Mondelez Int’l / MDLZ 47.13 68.1 18.8 2.2 50 26 23

Sources: FactSet; Credit Suisse

“In the past, you’d walk into a supermarket and see a brand, and a jingle would play in your head,” says Donny Kranson, a portfolio manager at Vontobel Asset Management. “You’d buy the same brands as everyone else, because we were all watching the same three television channels in prime time.” He says what has happened today can be summed up with one word: fragmentation.

Shoppers, especially younger ones, learn about products online from friends, bloggers, YouTube celebrities, and so on. The shift to online shopping has opened infinite shelf space for niche products. Barriers to entry for food upstarts are low.

“Reviews on Amazon.com and other online stores level the playing field,” says Kelly Flynn, a portfolio manager at Winslow Capital Management. “Companies no longer have to invest in brands over decades. You can read online reviews and see thousands of people who gave a product five stars.”

Customer tastes have splintered. Some want gluten-free. Others, low-carb for so-called keto diets. Many want simpler ingredient lists and virtuous treatment of workers and animals. Those who can afford it look for artisan foods, not megabrands.

According to Credit Suisse analyst Robert Moskow, an early bear on packaged food in general and Kraft Heinz in particular, the combined market share of the top 20 packaged-food companies fell to 42.4% last year from 46.8% in 2011. Much of the lost share has gone to niche and entrepreneurial brands. Moskow recently calculated that among the 20 best selling foods and beverages on Amazon.com, more than 70% were created by start-ups. These include a brand of coconut oil called Viva Naturals, which is riding the keto craze, and a snack called RXBar, whose maker was bought by Kellogg in 2017.

It isn’t just niche brands that are taking share. In a recent CNBC interview, big Kraft Heinz shareholder Warren Buffett noted the popularity of Kirkland, a store brand at Costco (COST). Indeed, private-label brands have gained more than a full percentage point of market share since 2011, reaching an estimated 19.5% last year.

That’s part of a broader power grab by grocers. Rising competition is forcing smaller players out of the grocery business, gradually consolidating control in the hands of a few huge, data-savvy players. Barron’s recommended Kroger (KR) stock at about $24 last May, but advised taking profits in November at $31. It’s slightly lower now. Last fall, it described its fastest-growing customer type as “very price- sensitive” and boasted about growing share for its in-house brands.

Packaged food has been in upheaval for years, but investors ignored some of the trouble signs when interest rates were at historic lows and plump dividend yields were scarce, Flynn of Winslow Capital says. Now, flaws are getting closer attention. Big Food has been cutting advertising spending for years to follow the example of investor 3G Capital, which had trimmed overhead and boosted margins at Kraft Heinz.

The payoff isn’t immediately clear. The group increased earnings per-share by 7% last year, but without tax cuts, it would have posted a 2% decline, Moskow reckons. By his math, 30% of products sold by big food companies face structural challenges. For Kellogg, Smucker, and Kraft Heinz, the number is 40% or higher.

Let’s not overstate the downside. The big food companies of tomorrow are likely to be the big food companies of today, says Deutsche Bank analyst Rob Dickerson. For one thing, there is no substitute for their scale. “These companies are half innovation and marketing and half logistics and distribution,” he says. “Without Big Food there’s no food, because you don’t have that kind of capacity anywhere else.”

Niche brands often sell to giant ones once order volumes balloon. For example, trendy SkinnyPop, made from just popped corn, oil, and salt, was snapped up by Hershey (HSY) last year.

And the food giants aren’t standing still on innovation. “It isn’t like they’re ignorant,” Dickerson says. “They completely understand what’s going on, and there are thousands of people at these companies working to grow.” But they will have to spend to find new winners while divesting losers, he says. And that could dampen growth for now.

It’s possible to find winning food investments in the absence of earnings growth, if the price is attractive enough. Last April, Barron’s made a case for General Mills (GIS). It has since returned 12%, including dividends, versus 6% for the S&P 500 index. Its experience shows why investors should resist forming one-size-fits-all theories about what’s working in food.

At a recent investment powwow called CAGNY 2019, for Consumer Analyst Group of New York, General Mills management touted virtues like waste reduction and on-trend products like Blue Buffalo organic pet foods, which the company bought last year. But it has also enjoyed healthy demand for naughty treats, like Lucky Charms cereal.

Still, we hesitate to recommend a second helping of shares at their now-higher price, with earnings per share expected to decline slightly for the fiscal year ending in May.

European food companies, including Unilever (UN) and Nestlé (NSRGY), are better-positioned than their American peers for now, says Vontobel’s Kranson, for two reasons. They hail from countries that are small relative to the U.S.—Unilever is Dutch and British, and Nestlé is Swiss—and so were forced early on to expand into diverse markets with localized tastes. That makes them well-suited for the current fragmentation of food demand. They also have ample exposure to emerging markets, where growth is relatively fast.

One American company Kranson likes is Mondelez International , (MDLZ) for its healthy mix of overseas sales and its exposure to snacks, which are enjoying above-average growth. Deutsche Bank’s Dickerson likes Mondelez, too, as well as a smaller U.K. outfit called Nomad Foods (NOMD), which sells frozen food in Europe under the Birds Eye and other brands.

As for the U.S. heavyweights, they are the most appetizing they have been in years in terms of stock valuations, but the growth recipes still need work. Best to wait before digging in.

While many automobile makers are stuck in second gear, Italy’s Ferrari is speeding ahead.

The recent improvements in the luxury-car maker’s operating performance will probably continue, the stock looks cheap, and the company just gave an optimistic outlook for this year.

UBS recently said that it expects investors to react positively, given the solid fourth-quarter results and “reassuring 2019 guidance.” The Swiss bank has upgraded the European luxury-goods sector to Overweight and highlighted Ferrari (ticker: RACE) as one of its key Buy ratings. Over the next year, it sees potential returns approaching 20%, versus recent prices.

The stock has performed very well, up 98% over the past two years, according to Yahoo! Finance. By a wide margin, that beats more mundane auto makers such as General Motors (GM), Ford (F), FiatChrysler (FCAU), and Toyota Motor (TM). Fiat gained 36%, while Ford dropped 30% over the same period, while the other two increased about 7%. All figures exclude dividends.

Ferrari has steadily improved its operating performance over the past few years. Gross margins hit 52.6% last year, up from 45.5% in 2014, according to Morningstar. Meanwhile, return on assets has almost tripled over the same period. The latest results showed a return on assets of 17.5%, versus 6.1% in 2014.

UBS sees that performance continuing with Ferrari’s margin of earnings before interest and taxes staying above 23% both this year and next, versus 15.6% in 2015. Ferrari, which earlier this week said it’s targeting 6% earnings-per-share growth this year over 2018’s level, based on target revenue growth of 3%, has supported the case for improved margins in its recent presentations.

The stock is hardly cheap based on traditional measures, but it is inexpensive based on its recent history. It trades a 20 times book value versus a 33 multiple in 2017, and 59 in 2016, according to Morningstar. That might seem pricey, but remember, Ferrari cars sell for about $300,000 each.

Analysts see room for more gains. Financial research firm CFRA rates the stock a Buy, which means that it should outperform its peer group over the next 12 months. It doesn’t specify a price.

UBS has a price target for the next 12 months of $150; that’s 17% higher than its recent price of $128. The dividend should add another percentage point to returns. The consensus analyst price target is a more modest $140, about 9% above recent levels.

Even though the outlook is favorable, there are risks. One of the ways that Ferrari keeps its mystique is its prowess on the racing circuit. The problem is that the Formula One competition is very tough. “Our brand image depends in part on the success of our Formula One racing team,” the Ferrari annual report states. Lower finishes could mean lower sales.

Likewise, the failure to innovate could cause other problems. “If we are unable to keep up with advances in high-performance car technology, our brand and competitive position may suffer,” the Ferrari report says.

There are other risks. Buying any luxury automobile is a discretionary purchase. For transportation purposes, a mass-market sedan or even a preowned vehicle will get you to your destination adequately. Buyers of Ferrari’s products may decide to put the brakes on any impulse spending, especially if the economic winds blow cold.

Still, in light of the relatively low risk and potential rewards, investors might want to make this famous company part of their portfolio lineup.

Verizon calls Wi-Fi ‘rubbish,’ but providers say it is cheaper and ‘getting smarter’

Cellphone companies can’t quit Wi-Fi just yet, though not for lack of trying. Cheap and unburdened by regulations governing mobile-phone service, Wi-Fi networks have grown from a coffee-shop perk to near ubiquity. There will be more than 549 million global public and cable company-run hot spots by 2022, contributing to a technology that accounts for more than half of all internet traffic, according to equipment maker Cisco Systems Inc.

At the same time, telecom executives say fifth-generation cellular technology could drive more data and revenue onto their networks. One of 5G’s top selling points is its ability to more cheaply link swarms of machines to cellphone networks.

Ronan Dunne, head of Verizon Communications Inc.’s new consumer-focused unit, says many customers should be able to get rid of Wi-Fi at home once 5G is rolled out and new technologies spread its signal throughout homes.

“Wi-Fi’s rubbish,” Mr. Dunne said in an interview. “It’s terrible. A lot of homes now, you switch off your Wi-Fi because your actual LTE signal is better,” he added, referring to the current generation of wireless networks.

Wireless hot-spot makers are working to fight that perception. Wi-Fi Alliance, a trade group for device makers, recently introduced Wi-Fi 6 as the industry designation for the next Wi-Fi generation. The group said the new technology, also known as 802.11ax, will make the latest hot spots’ improvements in speed and reliability easier for consumers to recognize.

Wi-Fi 6 boasts faster peak download speeds—a maximum 9.6 gigabits per second is quick enough to download a high-definition movie in a few seconds and several times faster than what early 5G specifications will offer. But device makers stress that the upgrade’s biggest benefit will come from the way new hot spots juggle clusters of cellphones, laptops and smart home gadgets that use the network at once.

“Wi-Fi and cellular technologies have been and will continue to be strong complements to each other,” Alliance marketing executive Kevin Robinson said, but “Wi-Fi is going to be that workhorse. No other technology can deliver the affordable performance in the home.”

A completely cellular-connected world would also be years away because manufacturers would need to replace almost all the internet-connected machines on the market. A cellular chip adds to the cost of any piece of electronics from a $1,000 tablet to a low-cost Amazon Echo, and most internet-capable gadgets don’t yet have one. By contrast, there are more than 30 billion Wi-Fi-capable devices in the wild, according to Wi-Fi Alliance.

Sitting in the middle are electronics makers like Cisco, Broadcom Inc., Qualcomm Inc., which also supply cellphone carriers with electronics and software. No company is likely to declare an early winner in the tug of war between the dueling connection types.

“I think the jury’s still out,” Chuck Robbins, Cisco’s chief executive, said in an interview. “There’s certainly a lot of downstream discussion about it.” Hot spots are so common, he added, that it makes sense to buy a device like a Wi-Fi-only computer tablet that isn’t likely to travel where a signal can’t be found.

Cellphone carriers’ strategy is also complicated by their dependence on Wi-Fi to relieve some of the pressure their private networks face in crowded areas. AT&T Inc. recently reached a deal that lets more of its cellphone customers use Boingo Wireless Inc.’s Wi-Fi service in airports, stadiums and other public places. The arrangement relies on the Passpoint system, which makes switching networks easier by automatically signing users into secured Wi-Fi networks.

Likewise, AT&T says its 5G service will eventually link an array of machines in shops, factories and offices. But for now, the company leans on the unlicensed wireless technology to serve customers.

Wi-Fi owes its popularity to simplicity and low cost. It works indoors where some outside cell signals can’t reach. Devices using the standard don’t need an individual subscriber-identity module, or SIM card, to reach the internet. But many networks aren’t secured with a password, leaving them less safe for users.

Even secured Wi-Fi access points are only designed to handle 250 connections at once. A much more expensive cellular base station could handle several hundred more links under certain circumstances.

Both technologies also need a broader range of radio frequencies to keep up with the public’s demand for video, which gobbles up internet bandwidth. Cellphone carriers spent the past week at MWC Barcelona, a mobile-technology convention, calling for government authorities to quickly grant them more wireless spectrum licenses. Wi-Fi equipment makers also pushed U.S. and European officials to stake out a new band of wireless spectrum around 6 gigahertz to give unlicensed networks more breathing room.

Boingo technology chief Derek Peterson said Wi-Fi has staying power. More carefully managed networks don’t suffer from the reliability problems many people associate with a weak signal beaming from a cafe corner, he said. Boingo grades networks’ dependability, for instance, to let smartphones and laptops automatically pick the strongest signal. Smartphone makers like Samsung Electronics Co. are making devices that recognize environmental cues, like when someone is driving, to toggle Wi-Fi connections.

“Wi-Fi is getting smarter,” he said.

- Trump tweets: "I have asked China to immediately remove all Tariffs on our agricultural products (including beef, pork, etc.) based on the fact that we are moving along nicely with Trade discussions.......and I did not increase their second traunch of Tariffs to 25% on March 1st. This is very important for our great farmers - and me!"