After peaking at close to $12 in March, the truth of the way CannTrust (NYSE:CTST) conducts its business put an end to the sector’s rally. A negative audit resulted in CannTrust suspending cannabis sales.In effect, the market decided that the cannabis stock no longer belongs in this red-hot sector. Still, speculators may pick at a bottom in CTST stock despite the risks.
In the near-term, CannTrust shook up investor confidence for other big names in the sector. Cash-rich firms that announce big acquisitions or spending deals may no longer spur a rally in their shares.
In the next few quarters, marijuana stocks will trade higher if the underlying company reports higher revenue and shrinking operating costs. The closer the company reaches profitability, the more likely the stock will rebound.
How will marijuana stocks fare as investors hesitate to speculate in them?
CannTrustCannTrust suspended sales of cannabis after Health Canada regulators found out it produced the good illegally in June. CTST stock lost around half of its value in the last month and continues to fall.
If management knew that the company produced cannabis illegally, it will shatter the company. If an indictment comes, it may lead to more revelations on how companies are dealing with the supply shortage.
CannTrust voluntarily brought forward some compliance issues at its Vaughn, Ontario facility to regulators. Together with the voluntary hold on sales and shipments, expect the pause on revenue to lead to a higher cash burn rate. Even if CannTrust is cleared of any wrongdoing, it may need to raise cash on the markets to resume operations beyond 12 months.
Canopy Growth Corporation
CannTrust’s fall added fuel to the drop in shares of Canopy Growth (NYSE:CGC). On July 3, the company forced co-CEO Bruce Linton to resign. Though the company still has CEO Mark Zekulin at the helm, the firing signals a shift in Canopy’s growth strategy. It may no longer have the freedom and flexibility to spend extravagantly on building its operations. Instead, CGC now needs to satisfy its majority shareholder, Constellation Brands (NYSE:STZ). And the only way to appease Constellation Brands is to report a profit.
Generating a profit may prove difficult. In its fourth quarter, Canopy lost C$0.98 even though revenue tripled to C$94.1 million. Operating expenses continued to grow after Canopy expanded rapidly in the U.S. Its Acreage Holdings acquisition may give it a path to serve recreational and medical markets upon federal permissibility. Yet profits from the expansion are hardly assured.
CGC has some growth prospects ahead. The $5 billion from STZ will fund its accelerated global expansion. This will pay for Storz & Bickel and the German cannabinoid compound company, C3.
At the end of the first quarter, Canopy had $4.5 billion in cash and cash equivalents. It will not need to sell shares or debt in the near future.
Aurora Cannabis (NYSE:ACB) lost nearly 10% in the last month as pot stocks sold off in that period. On July 15, it obtained two licenses for outdoor growing operations in Quebec and British Columbia. Its western facility adds 207 acres while its eastern facility adds 21,000 square feet.
Aurora stands out against the other cannabis companies because it is run independently. It is not merging with any other firm and has no major shareholder whose management may interfere with Aurora’s growth objectives. And with more variety in the way cannabis is consumed, demand will only grow. Edibles, topical, and concentrates are getting legalized this fall. The under-supply and excess demand may set off better pricing levels for Aurora. Economies of scale and lower raw material costs will give Aurora’s profit margins a lift, too.
In May, Aurora reported an EPS loss of 12 cents on revenue of $48.38 million. Its next report may come in September. Analysts expect losses will shrink as revenue nearly doubles sequentially to $87.5 million. Consider ACB as a marijuana stock to buy.
Unlike the other cannabis stocks, Cronos (NASDAQ:CRON) stock is in a holding pattern, trading between $14 and $16. Cronos is pinning its gross margin expansion on the new markets it is entering. Edibles and vapes are potential revenue generators. But ramping up sales from those markets will take at least one full year. Fundamentally, Cronos has a positive growth momentum but it is still losing money.
In the first quarter, Cronos reported net revenue of C$6.5 million, up 120% from the previous year. Higher CBD oil and dry flower sales led the increase. Operating expenses topped C$13.88 million as general and administrative costs topped C$9.6 million. It ended the quarter with C$2.4 billion in cash equivalents, thanks to the Altria Group (NYSE:MO) investment.
Investors are not bailing on Cronos stock, mainly because of its connection to Altria. Altria’s backing in the company assures years of continued operations despite quarterly losses. Its expertise in cultivating, plus a strong management team to guide the cannabis firm, will assist the firm in achieving profitability.
In the near-term, CRON stock may fall slightly as investors sell out of the sector. Watch for the marijuana stock to hold the $13.50 to $14 level of support. Even if selling pressure mounts, those who waited for an entry point may look at CRON stock at those levels.
Of all the cannabis stocks available, Tilray (NASDAQ:TLRY) is the riskiest one to buy. The stock enjoyed a share price of above $200 in September 2018. Since then speculators tried unsuccessfully to bring the stock anywhere near that level. At barely below $50, Tilray still has a $4.1 billion market capitalization. Investors are not doing enough to question the stock’s valuation but bulls benefited from one event: share lockup delays.
On June 10, Tilray’s top shareholder, Privateer Holdings, said in a binding letter of intent (LOI) that it would extend the lockup of the orderly release of TLRY shares. This will spare the company of an acute selling pressure that may hurt the stock price. By selling the shares steadily over two years, this shareholder may avoid hurting the price. In the meantime, Tilray has plenty of work ahead to bolster its business.
To increase its addressable market, Tilray acquired Smith & Sinclair to develop CBD-infused edibles. The firm specializes in alcohol-infused candies and edible fragrances. Consumers who do not want them may instead consume CBD, the non-psychoactive compound. The CBD edibles market is potentially a $4.1 billion market, according to analysts at Arcview Market Research.
Despite its potential size, Tilray will have to compete with a wide range of companies and other marijuana stocks. This includes Naturally Splendid Enterprises (OTCQB:NSPDF) (TSX-V:NSP), Charlotte’s Web Holdings (OTCQX:CWBHF) (CSE:CWEB), Green Organic Dutchman Holdings (OTCQX:TGODF) (TSX:TGOD), Curaleaf Holdings (OTCQX:CURLF) (CSE:CURA), and Green Thumb Industries (OTCQX:GTBIF) (CSE:GTII).
As of this writing, the author did not hold a position in any of the aforementioned securities.