This Underdog Marijuana Stock is Worth Watching

The Senate vote that will move Canada closer to becoming the first country in the developed world to legalize recreational marijuana is only two weeks away. If the Senate votes in favor of the Cannabis Act, as is widely expected, Canada could be weeks away from legalizing adult-use cannabis.

The ramifications for Canadian cannabis growers and those interested in investing in cannabis have been huge. Especially, considering the market’s estimated additional revenue could be around $5 billion annually, on top of preexisting MMJ sales and exports.

With this anticipated market growth in mind, cannabis growers have been rushing to expand as much and as rapidly as balance sheets allow.

On the plus side, such rapid expansion has presented growers with new opportunities to arrange deals for long-term supply with retailers and/or Canadian provinces. The growers that manage to secure these deals gain extra footing in the guarantee that a percentage of their annual production will be accounted for; this security is an advantage in a volatile industry, particularly amidst concerns of oversupply.

The downside has been in the drainage of capital, as much of it has been reinvested in expanding this production capacity, leaving numerous marijuana stocks unable or struggling to operate in the black. The reality for most of these stocks has been a continual loss of money, a pattern which may be carried out across future quarters.

This has not, however, been true of one medical marijuana stock, CannTrust Holdings (NASDAQOTH:CNTTF), whose profits have made a consistent statement.

CannTrust Holdings has somehow managed to fly under the radar in the world of marijuana stocks, quietly outperforming most of its peers in profit and innovation. The company released its Q1 results last week, celebrating its third consecutive quarter of generating a profit.

CannTrust’s most recent quarterly revenue was close to $6.1 million, a record for the company and a 158% increase from the same period last year. Two main factors lay behind the sales surge: a 186% increase in the company’s active registered medical patients, and a highly focused push into the market of cannabis extracts and oils.

Extracts may be niche items with a smaller market, but they come at far higher price points and profit margins, compared with traditional dried pot. The company’s Q1 extract sales exceeded four times the sales of the previous year’s first quarter, at $3.47 million. The sales of extract also gave CannTrust’s shares a push, bumping per-share profits by CA$0.12 in this year’s first quarter.

CannTrust has also shown its willingness to go to great lengths to increase its patient base, and better its bottom line.

At present, the company’s phase 2 is underway for expanding its Niagara facility; upon completion of the project, the facility will provide CannTrust with a growing space of nearly 1 million square feet. However, the company’s other facilty, Langstaff, had to give up space in order to house plants while the Niagara facility was in the midst of phase 1, and this temporarily cost CannTrust growing space. The company did not settle for producing less, and instead, turned to a third-party to provide product in the interim.

Among marijuana stocks, CannTrust has also excelled in product innovation. The latest innovation, introduced in April, was cannabis oil encased in vegan hard shell capsules. This move opens up a wider market for the company, reaching customers who do not consume animal by-products (i.e., gelatin), which most cannabis oil capsules are made of.

The company is also seeking to make the cannabis industry key players in the pet health industry.

On the heels of the vegan oil capsules announcement, CannTrust disclosed a new venture with Grey Wolf Animal Health, the aim of which will be the development of CBD-based products for pet wellness.

On top of all this, CannTrust’s Vaughn facility increased its growing capacity at the end of the quarter to 60,000 square feet. The Niagara expansion has been, and continues to be on schedule and within budget. And the grower exceeded Wall Street’s estimates of its profit by 18 times, making it a strong contender for the cheapest cannabis cultivator around.

CannTrust, like any marijuana stock to invest in, comes with sizable concerns for investors to take into consideration.

First and foremost among many growers is the threat of cannabis supply glut. The estimates have a wide variation, but most believe Canada’s market demand will be between 800,000 and 1 million annual kilograms. Concerns for oversupply have risen given estimates of domestic production. 

Sean Williams of The Motley Fool calculated that Canada’s oversupply may be as great as 1.3 million kilograms in the next two or three years. The good news for CannTrust is that, with a heavier reliance on extract sales, it may not be as critically affected by oversupply as its peers that only deal in dried cannabis.

The second sizable concern for investors interested in CannTrust is that, even with its growing production capacity, it may not make it among the top 10 cannabis growers in terms of the most in annual production. It could be detrimental for the company to find itself relegated to a middle tier in such a competitive industry, where long-term supply deals may make or break a cannabis grower. Given the company’s proven willingness to work harder than most of its larger competitors, it may still be able to distribute its production.

Perhaps the largest concern, however, is dilution of shares.

CannTrust’s story is the same as with all of Canada’s publicly traded marijuana growers: bought-deal offerings have replenished operating cash flow in order to fund capacity expansions.

In bought-deal offerings, common stock are sold along with convertible debentures, warrants and/or stock options, for the purpose of raising capital. Each one of these options leads, eventually, to an inflated share count and ultimate dilution for existing investors.

The day following CannTrust’s release of its Q1 results, the company announced another bought-deal offering for $58.1 million, which it expanded a day later to $67.6 million. And this allotment could increase further if underwriters jump on the opportunity. The catch-22 is that capacity expansion has been necessary, and this requires capital; but, the pathway may ultimately drag down the company’s existing shares and future EPS.

All things considered, CannTrust remains above average among marijuana stocks and cannabis growers, and investors may do well to consider CannTrust in the future. For the time being, perhaps keeping the company under close radar, watching the progress of its projects, and the stability of its bottom line is the best position.

(For more news on cannabis growers, read A Quick Review of 7 Cannabis Stocks Cultivating an Unbelievable Amount of Green)