The Life Sciences Report: Bruce, can you tell us a little bit about StoneCastle Investment Management?
Bruce Campbell: We are based in British Columbia and manage two funds for Redwood Asset Management. One of those funds is a growth fund, and "go anywhere" is its mandate. So, we're everywhere that we find opportunity. We're all-cap as far as size goes; we can be super small, and we can be super big. That gets dictated by the opportunities.
As far as sectors go, we don't have to own a sector, and we cap the maximum exposure that we have in a sector. We could be higher weight in a sector, and then a couple of quarters down the road, we may have no exposure in that sector. It all depends on where we see the opportunities, where we see the growth and also where we see the overall market.
TLSR: One of the sectors you seem to be fairly active in is healthcare. Would you give us an overview of what has happened in the sector in 2017 and what you expect going into 2018?
BC: We find that we have a number of opportunities in that sector. We're looking for companies that have an earnings profile that's accelerating. The healthcare sector, especially in the smaller market capitalization stocks, really fits the bill.
What we've seen in 2017 is there continues to be pockets there, so we've had some successful investments in a number of different areas. We've had some investments that we've held and then trimmed out of, and watched them go significantly lower because of valuation or other opportunities.
Going forward into 2018 and beyond, I think that healthcare continues to be a big growth sector and there are going to be opportunities that come up.
TLSR: With your portfolios, you can be either in a defensive or offensive mode. Where are you right now? What do you foresee in 2018?
BC: Part of our process is we have a top-down screening process. That's what helps us drive whether we're on offense or defense with our portfolios. If we're on offense, we're fully invested. If we're on defense, then we'll have substantial amounts of cash in the portfolio; 40% or 50% of the overall portfolio can be in cash at one point.
Coming into 2017, we were on offense. We run this as a giant checklist. It's almost like a pilot's checklist before they take off. They have all these boxes with checks in them, and if everything fits, then they can take off. Same thing with us. We have this big checklist of a number of different variables and as these different variables and indicators have all the boxes checked, then we move from defense from offense. And vice versa: When we start to see the boxes become unchecked, we move from offense back toward defense. We also have a middle ground position that we call neutral, when some of the boxes are unchecked but not all of them, and not enough to put us fully on defense.
In the early spring we started to see a few boxes deteriorating. As the spring continued, we saw more of those boxes become unchecked, so we went to neutral positioning. We raised cash. Then, going into the fall—late August or so—we started to see a number of these boxes getting checked again, so we went back to offense. We've been sitting on offense since probably the second week of September now, and the portfolios have done extremely well.
Going into 2018, we're still on offense. There are a few things that have us cautious, in that a few of the boxes in the sentiment area have now started to get unchecked. They work opposite of anything else, but they don't have a super high weighting. When that happens, we become more cognizant of what the other indicators are doing.
Right now, most of the economic numbers in North America are still very strong. But it certainly wouldn't surprise us if we, especially on economic expectations, started to see that wane a little bit in the first or second quarter of 2018, which might lead to a bit of a correction. As long as the economy continues to be as strong as it has been, I'd be surprised if we started going full defense and see any type of recession any time soon. That could change with the data and we're very driven by what we see with the data, but as of right now we don't see that happening.
TLSR: Do you limit yourself to Canadian equities or are you agnostic?
BC: We don't limit ourselves just to Canadian. We will look at opportunities everywhere. What we've found, though, is that typically we get higher returns in Canada. The reason is because, structurally, how the Canadian markets have been set up is that the big bank-owned firms dominate the Canadian market. Canadian investors as a whole tend to be very conservative and very risk adverse. So the Canadian banks' investment divisions typically are large-value investors and large-cap investors. There are not a lot of small and midcap growth investors in Canada as, say, a percentage of what there would be in the U.S.
We actually find that we generate higher returns in Canada than we do in the U.S. using the same process. That's because the market in Canada tends to be so dominated by large-cap value managers, whereas in the U.S. there are many more people doing everything, turning over every stone.
We tend to see some of our best returns from companies that are Canada-listed and have U.S. operations.
TLSR: Let's talk specific companies. What healthcare companies are your Watchlist picks for 2018?
TLSR: Would you tell us about Reliq?
BC: Reliq is almost a technology healthcare company in that it has a software technology that allows home care service to be delivered on a whole different level. Typically, in the past, in a home care service, a home care professional would visit a patient's home a few times a week and monitor whatever needed to be monitored. That medical information may or may not make it into a patient's record.
Reliq developed a technology that works with a number of different types of hardware whereby it's all voice activated—almost Alexa-type technology—to do all this monitoring for you. It will voice-prompt you when to take your blood pressure and, if you're diabetic, when to do your blood tests. It can also monitor whether or not you've been up and active. All this information is sent to your caregiving team, including your family, in real time. Its goal is to try to bring better healthcare, to try to be more proactive than reactive. And then, obviously, the end goal is to make healthcare costs less.
Reliq worked for a number of years on this technology. During 2017 it had a couple of pilot projects with different health authorities. Now, it has signed contracts with health authorities and is actually rolling out the system and bringing those patients onto its system through its partners.
Where Reliq was burning money before, now it's getting very close to the point where it's going to be profitable, and it's growing at a tremendous rate.
TLSR: Let's go on to VieMed.
BC: VieMed is an interesting company because that was spun out of Patient Home Monitoring Corp. (PHM:TSX.V). It is now trading on its own after the spinout. This is a ventilator business, and has been super high-growth. This is what makes it exciting.
Patient Home Monitoring started off as a small company that did other monitoring services. Then the company went on a huge acquisition spree and bought a number of different companies, around 15 or 16, in about an 18-month period. It was the darling in the Canadian stock market, and probably got pushed to a valuation that was way in excess of where it should have been, but that often happens. Then the stock started to pull back. Management went from being the kings of the Street to very poorly liked on the Street, partially because of their own stock sales and partially because of a financing. The stock has languished at this level. Part of that was waiting for news of the shareholder vote to come out, but I think a lot of people don't like the former management, so they're not willing to look at it.
But the valuation is crazy in that the stock's probably growing at a 20%-plus rate per year, and yet the stock trades at probably less than six times its EBITDA. So, the valuation is very compelling on that company, with the growth that it has and with the valuation. At some point, when companies are growing that fast and that cheaply, investors have to look past the former management issues and invest. I don't know when that happens, but when it does, it gets revalued and the stock price probably has a big move.
TLSR: Was there a major management change recently?
BC: Two men who ran one of the businesses that it bought, Sleep Management, have now become the management of VieMed, which is the ventilator business. They are also significant shareholders. The other division, Apparo, is now being run by a man whose business had also been bought out. So, it went from financial market guys who weren't operators to where it has people who are real operators working on the business day to day.
The old management, interestingly enough, is still on the board, and they're still part of the shareholder vote that just went on to stay on the board. But the management circular noted that once the split happens, they would step off both boards, so they'll no longer be involved directly.
TLSR: Would you tell us a little bit about Friday Night?
BC: Friday Night operates a medical and a recreational marijuana operation in Nevada. It was actually the first company to get a medical license in Las Vegas, and it was also the first to get a recreational license. It has two sides of its business, the traditional getting high on marijuana THC business for both medical and recreational, and a cannabidiol (CBD) side called Infused, the nonpsychoactive component, which is also growing tremendously fast.
I think it's in the right market and has huge runway ahead of it, and I think it has two businesses that are going to cover completely different groups over time. The CEO says on the THC side, it has a business where probably 20% of the overall population could consume its product at some point in time from a recreational standpoint. It might be higher than that in Las Vegas due to the nature of the tourism industry. The CBD side is wellness supplements. Much like what we saw with fish oil sales, when everyone discovered they needed omega-3 supplements, the same thing will end up happening with CBD because of all the properties that a number of the different cannabinoid compounds have on the body. That's something that 100% of people could use.
Friday night has positioned itself very well. It's going through a major expansion right now. It has raised some money. It has more money that will come in with the exercise of some warrants and conversion of some of its convertible debentures. The stock is cheap compared to its peers. [Note: Since the interview, the company has announced a merger with Body and Mind (BAMM); according to Campbell this will increase the footprint more in Las Vegas and will be accretive to TGIF's numbers.]
TLSR: At a macro level, not specifically with Friday Night, which should do better—companies involved in the medicinal side or the recreational side? Do you have a sense of that at this point?
BC: I think that the recreational side is going to be big in that you have a drug that hasn't been legal for 70 years now, all of a sudden, becoming legal. The market already exists. But I also think there's going to be a crossover, and there's going to be a market that does get built.
And then in the longer term, I think that the nutraceutical/pharmaceutical side becomes many multiples of the size of the recreational market, for the exact reason that there's been 70 years of prohibition on research, but there's been thousands of years of use of the plant. And there's a ton of anecdotal evidence of what it does. I think science will now start to break down the 100-plus compounds that are in cannabis and show us that different compounds from the cannabis plant could help with post-traumatic stress disorder or epilepsy or dementia or cancer. Trials are being done now in all of those areas, and I think they're going to probably continue.
At some point, we potentially could all be taking some type of supplement that has CBD in it. And then there will also be a number of different pharmaceutical drugs that have cannabis compounds in them that you're not going to necessarily know that they do. But you're going to go to your doctor with an ailment, you're going to get a prescription, then you're going to go to the pharmacy and get it filled, and you're going to discover it was a cannabis compound in some variety.
Right now, everyone is focused on the recreational side of things, but I think longer term the pharmaceutical/nutraceutical side becomes significantly bigger.
TLSR: Would you tell us about LGC Capital?
BC: LGC is another company in the same space as Friday Night, except it is operating on a global basis. LGC has done deals in South Africa and in Australia, more on the hemp side of things, which tends to be less of the psychoactive component and more of the nutraceutical/pharmaceutical. It's trying to build a global hemp business and has been fairly successful so far in making acquisitions and growing different divisions on a global basis, which we haven't really seen so much to date.
TLSR: LGC is just out with an announcement that it's ready to break ground on a 60,000-square-foot facility in Quebec, outside of Montreal.
BC: Yes, it is breaking ground on the Canadian facility, so the Canadian opportunity is happening, but it already has two bigger facilities in South Africa and Australia that are actually producing right now.
TLSR: Thanks for your time, Bruce.
Founder and portfolio manager of StoneCastle Investment Management Inc. and a former portfolio manager for some of the largest investment dealers in Canada and the U.S., Bruce Campbell brings more than 25 years of experience to fund management. A graduate of the University of Alberta with a bachelor of commerce degree specializing in finance, Campbell has earned multiple designations in investment management, including the Chartered Alternative Investment Analyst (CAIA) and the Chartered Financial Analyst (CFA) designation, one of the most prestigious designations in the financial industry. Campbell is a past president of the Okanagan CFA society.
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1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this interview are billboard sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services. Click here for important disclaimers. As of the date of this article/interview, an affiliate of Streetwise Reports has a consulting relationship with Reliq Health Technologies. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Bruce Campbell: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Reliq Health Technologies Inc., Friday Night Inc., LGC Capital Ltd.. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this interview: None. Funds controlled by StoneCastle hold securities of the following companies mentioned in this article: Reliq Health Technologies Inc., Friday Night Inc., LGC Capital Ltd. and VieMed. I determined which companies would be included in this article based on my research and understanding of the sector. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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