May 31, 2025
Commentary
Introduction
During the month of May, broader market indices rebounded as sentiment turned positive with trade talks continuing to reduce the temperature and threats around tariff barriers. The new reality is that all countries will need to deal with tariffs, the remaining question is to what degree. Now past the initial shock of extreme tariff headlines, investors have become more sanguine at the prospect of working within a new global trade framework, focusing on underlying fundamentals such as earnings growth to drive investment decisions. The indexes closely associated with the Fund witnessed selling pressure given consumer weakness and concerns with regulatory changes in the sectors central to the Fund. The S&P500 Healthcare Index was down 4.71% for the month, while the Cannabis sector also saw continued price pressure, with MSOS down 14.8%, and the North American Marijuana Index negative at 5.8%.
In this month’s commentary, we review recent US federal and state-level regulatory changes in cannabis and hemp laws. It appears that the cannabis and hemp lobby is gaining supporters from the wine and spirits industry, as many liquor stores are benefiting from shelving THC and hemp-derived beverages. On the earnings front, we cover the Q3 results of a top fund holding, Costco (COST), with results that continue to demonstrate leadership in consumer health and retail. On the cannabis front, California based Glass House Brands (GLASF) continues to grow sales in CA at a time when the state is seeing negative sales trends. Through its large-scale greenhouse operation, GLASF continues to increase margins and generate stronger cash flow. Finally, we want to feature a new fund holding, National Vision (EYE), a US network of retail outlets that provide eye exams, eyeglasses, contact lenses and related services that is positioned for growth in this competitive environment.
Market Update
Despite persistent Wall Street predictions of an impending recession, our analysis of forward-looking data indicates continued, non-recessionary growth. This outlook is supported by expectations of elevated CPI and yields, which in turn suggest that the US Federal Reserve is likely to deliver fewer rate cuts than previously anticipated. Currently, Fed Funds Futures are pricing in about two rate cuts by year-end, down from nearly four just a month ago. If our forecasts for stronger growth and higher inflation materialize, even these two cuts could be in doubt.
A significant challenge for the Trump Administration’s economic strategy has been the bond market’s reaction to maintaining rates at a higher range than what President Trump desires. On the fiscal side, the administration’s recently proposed 2026 budget calls for a 7.6% reduction ($139.9 billion) in discretionary spending, while simultaneously advocating for new tax cuts totalling an estimated $4 trillion over the next decade. Both the bond market and the dollar are flashing warning signs about rising inflation, heightened credit risk, and a decline in US global financial dominance. Notably, all three major credit rating agencies have now downgraded US government debt below AAA, citing persistent deficits and mounting interest payment costs as key factors. The last time the US lost its AAA credit rating was in the early 2010s during the Obama Administration.
Despite these challenges, the U.S. macroeconomic backdrop is turning more favourable as we move into the second half of 2025. In April, the U.S. money supply reached a record high for the first time in three years, signalling a return to monetary expansion. Global liquidity is also on the rise, with new stimulus measures being rolled out in both Europe and China. We may be approaching a renewed phase of quantitative easing, which is typically supportive for risk assets. Looking ahead, our core thesis remains unchanged: lower volatility, even with only moderately bullish equity market trends.
Rescheduling Update
One consistent theme across both the Biden and Trump administrations when it comes to marijuana legislation is that it only becomes a priority when it is politically necessary. This is playing out with the current administration, with reform seemingly put aside as myriad other priorities take the spotlight. On a positive note, there does not seem to be widespread opposition to reform within the administration, but neither is there significant will to push it forward. We believe that given the popularity of cannabis legislation reform with the electorate, it will move up in priority as we get closer to the midterm elections. The incumbent party often loses seats in the midterms, so it is reasonable to expect a push for popular issues. The revenue-generating potential from cannabis legislation reform may also take on additional focus by states seeing reductions in federal funding.
Wine & Spirits Wholesalers of America (WSWA) Support Cannabis & Hemp
Wine & Spirits Wholesalers of America (WSWA), has previously backed federal legalization of marijuana and hemp products, stated in early June that it supports the effort to ban synthetic cannabinoids such as delta-8 THC that in their view has used the 2018 Farm Bill as a way to work around the intent of the bill. WSWA President and CEO Francis Creighton said in a press release. “But prohibition of all cannabinoids is not the answer…it risks sweeping up state regulated and Farm Bill compliant hemp-derived products that have driven a new and dynamic market.” Their concern is that by (once again) making all cannabinoids illegal, that will only enhance the illicit market, allowing those non-compliant participants to distribute more harmful products. Mr. Creighton’s view is that current state laws that protect public safety may be put in conflict with proposed federal law. By not formally addressing illicit market dynamics and synthetic cannabinoid development at the federal level, the result is a state-by-state regulatory patchwork that enhances illicit distribution. There are growing, profitable, legally run businesses that are employing hundreds of thousands of people that require clarity on the issue. “A total ban would be devastating.”
John Giarrante, president of Show Me Beverages in Missouri, said "Congress’ proposal to ban naturally occurring hemp-derived products like Delta-9 will undermine the legitimate and responsible work we’ve done to meet consumer demand while prioritizing public health and safety.”
Texas expansion of Medical Cannabis & Limits to Hemp Derived Products
There has been considerable debate in Texas reviewing current regulations related to consumable hemp products that contain synthetic cannabinoids, often called delta 8 products. Under proposed Bill 3, TX is looking to ban the sale of those products that had previously been approved within the 2018 Farm Bill. In 2019, the state legislature supported passage of the Farm Bill when the state legalized hemp products derived from cannabis plants with less than 0.3% THC. Now, six years later, Lt.-Gov. Dan Patrick is considering the removal of synthetic cannabinoids from state stores. In the six years since the state allowed the industry to grow, there are an estimated 50,000 jobs in TX related to hemp consumable products, with over 8,000 retailers involved in distribution.
While hemp-derived products are potentially being restricted, the state is considering an expansion of its medical cannabis program. Bill 46 expands the medical cannabis program, adding more products and, more importantly, adding more qualifying conditions. Currently, TX is among the most restrictive states when it comes to medical cannabis and the number of conditions cannabis can treat. Limiting the number of dispensaries, limiting storage of inventory results in challenges with respect to distribution. Under the new proposed rules, the state would open nine new dispensaries resulting in twelve stores statewide. Product expansion would also result in additional opportunities for cannabis operators to exploit with products such as inhalers and vapes being added to allowable formats.
In terms of conditions, the state could open the number of medical conditions that can be treated which is a significant step forward, and in TX conditions such as traumatic brain injuries, chronic pain, Crohn’s disease, and terminal illnesses are considered to be added to the list of qualifying conditions. This would provide significant opportunities for those operators that would be able to exploit this new state market with a population of 31 million people.
COST continues to beat estimates
CostCo (COST) continues to see sales growth in the U.S. amid broader consumer weakness, beating analyst estimates on a top and bottom-line basis. In a challenging environment for retailers and consumers, COST continues to deliver value for members while still increasing margins and EPS. In fiscal Q3-25, COST beat revenue estimates with net sales of $61.97 billion vs consensus of $61.88 billion, with net sales growth of 8.0% YoY vs Q3-24. During that same 12-month period, same store sales (SSS) grew by 8.0%, that is after SSS in Q2 of 9.1% in FQ2. Traffic into the stores increased 5.2%, while transaction volume increased 2.7%.
A theme that has been present in most management calls of late has been how they are dealing with the new tariff environment. COST is one of the few teams that is confident in its ability to navigate the tariff environment, having already rerouted production from what they term “high tariff” countries. In a time where many consumer-facing companies are finding it hard to grow margins company-wide gross margins expanded by 29 bps ex. gasoline, an increase of 4 bps from FQ2. One of the keys to success for COST is its ability to bring in products that its members want, while keeping prices low. Its membership strategy is integral to this overall approach and continues to show strong membership income, growing 11.4% in the quarter from 9.4% in Q2. Since Q2, the company has opened nine additional warehouses and has plans for ten more by the end of Q4. Net Income in the quarter was $1.9 billion, 13% growth with diluted EPS of $4.28 vs consensus estimates of $4.24.
Glass House Brands Leads in California
Glass House Brands (GLASF) reported positive Q1-25 results, continuing to illustrate the scale efficiencies of its multi-year conversion of greenhouse operations in California. The company reported sales of $44.8 million vs consensus at $43.4 million, with retail sales up 18.8% YoY, and wholesale revenues up 63.7% YoY. At a time when statewide retail sales have contracted by 13%, the company’s relative performance is significant. Impressive sales performance was combined with cost efficiencies as GLASF reduced its cost of production to $108/lb. (40.7% y/y cost decline), resulting in a wholesale biomass gross margin of 46.6% despite lower retail prices in CA. Gross profit was also a beat at $20.1 million, beating consensus by over 600 bps with gross margin reaching 44.8% vs consensus at 37.9%. Adj. EBITDA during the traditionally soft period. Q1 period was $4.4 million vs consensus of $1.6 million. At the end of Q1, the company had $37.6 million in cash and total debt of $65.8 million. As the company continues to build efficient greenhouse operations in CA, it is at the forefront of the potential for hemp-derived product distribution across the US, generating additional revenues and cash flow in new markets.
EYE National Vision: New Fund Holding: Expanding in Eye Exams
We are highlighting a new fund holding, National Vision (EYE), a national eyecare and eyewear retail network, that released its Q1 results in early May. EYE was founded in 1990 and now operates under four retail brands, each providing services to different segments of the eyewear market. America's Best provides eye exams as well as eyewear solutions. Discount Contacts is an e-commerce based platform providing a wide array of contact lenses at discounted prices. Vista Optical operates near military bases and within Fred Meyer stores (US northwest), offering value pricing and eye exams performed by independent optometrists. Eyeglass World operates a network of stores offering eye exams, contact lenses and same day prescription eyeglasses with in-store labs.
Q1 Revs were $510 million, showing solid growth of 5.7%, with same store sales (SSS) growth of 5.5%. Sales beat consensus estimates by 1.8%, with EYE providing operating income of $41.3 million and adjusted earnings of $0.34/share compared with $0.30/share in Q1-24, beating consensus by 17.2%. Revenue growth has been driven lately by higher priced glasses and an increase in traffic from a change in market positioning, as well as a push to build its presence in offering services to managed care patients.
EYE has gone through a significant turnaround over the last two years, putting it on an upward trajectory for 2025. In 2023, EYE announced the end of an approx. 30-year relationship with Walmart and its AC Lens operations, providing eye exams and frames inside Walmart stores. The Walmart agreement accounted for 17% of EYE’s revenues. Another challenge that had to be fixed was that only 33% of customers were managed care patients, resulting in weaker sales during recessionary periods. Combined with cost-cutting exercises to reduce overheads and changes in leadership, EYE has been put on much better footing in early 2025. Gross margins have increased on improved product margins of eyeglass frames and lenses, and growth in other add-on sales, which more than offset the dilution in contact lens product margin and increase in optometrist-related costs. These efforts resulted in an SGA decrease to 47.2%.
While efficiency gains are being realized, management is coming to the end of a capital expenditure program that started in 2024, providing tech and a communications platform to perform remote eye exams at its stores. Patients come into a store, and the optometrist can perform the eye exam from another location, providing greater flexibility related to maintaining optometrists in multiple stores. In addition, EYE’s historical value-positioning in the eyecare market has helped as the trade down continues in retail, where EYE stores are seeing a greater percentage of customers coming from over $100,000 households and managed care is part of that.
Options Strategy
Since the inception of the option writing program in September 2018, the Fund has generated significant income from option premiums of approximately CAD$5.26 million. We strongly believe that option writing can continue to add incremental value going forward.
We continue to write short-dated covered calls on names we feel are range bound near term and from which we could receive above average premiums. We also continue to write short, dated cash secured puts out of the money at strike prices that offer opportunities to increase our exposure, at more attractive prices, to names already in the Fund.
Ninepoint Cannabis & Alternative Health Fund - Compounded Returns* as of May 31, 2025 (Series F NPP5421) | Inception Date - August 4, 2017
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|
Fund |
-4.77% |
-13.80% |
-11.49% |
-18.40% |
-32.74% |
-16.72% |
-10.64% |
-0.67% |
*All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at May 31, 2025.
Statistical Analysis
Fund |
|
|---|---|
Cumulative Returns |
-5.16% |
Standard Deviation |
27.1% |
Sharpe Ratio |
0.03 |
The Ninepoint Cannabis & Alternative Health Fund, launched in March of 2017 is Canada’s first actively managed mutual fund with a focus on the cannabis sector and remains open to new investors, available for purchase daily.
Charles Taerk & Douglas Waterson
The Portfolio Team
Faircourt Asset Management
Sub-Advisor to the Ninepoint Cannabis & Alternative Health Fund