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Stone Fox Capital Advisors is a registered investment advisor founded in 2010. The firm offers portfolio management with a focus on opportunistic stocks providing secular growth trends at an affordable value. An emphasis is placed on fundamental analysis though charts are used for timing entry and exit points. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA. Invest with Stone Fox Capital's model Net Payout Yields portfolio on IB Asset Management as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here: http://ibkram.com/stone-fox-capital Follow Mark on twitter: @stonefoxcapital

Cannabis Stock CannTrust (CTST) Looks Compelling on This Earnings Selloff


CannTrust (CTST) fell 25% from the $10 peak last week due to a disappointment with Q4 results. The market has placed too much emphasize on short-term results in a sector where the rush into recreational-use cannabis in Canada was difficult to project. The opportunity exists to look past the supposed weak towards substantial growth opportunities in planned expansion and move into legalized edibles.

Ignore These Results

The market was disappointed that the Ontario-based medical and recreational cannabis company only reported Q4 revenue growth of 132%. CannTrust generated revenues of C$16.2 million while the market wanted something closer to C$20.0 million.

The huge disappointment was partially the outcome of short-term average prices as CannTrust ramps up production. In general, the industry failed to match consumer demand with production start-up costs pushing into the December quarter without the benefit of the related sales.

A big part of the weakness was the average revenue per gram of extracts declined to C$4.29 from C$9.34. The market expected extracts to remain close to the higher sales prices of the dried cannabis used in medical cannabis that sold for C$7.10 in the quarter. The medical cannabis sales prices only dip slightly above 10% from prices last year.

For the stock to gain in 2019, Management will have to show that bottlenecks in production were the reason for such disappointing sales prices during the quarter.

Focus On These Growth Initiatives

Since CannTrust recently uplisted to the NYSE, the stock won’t get a boost from this process. The key here is the production growth already in the pipeline versus a lot of the minor players just now moving into goals of increasing production.

The company is already in the works to increase annual production capacity to 50,000 kgs in 2019 and 100,000 kgs by the 2H 2020. On top of this goal, CannTrust is leading the market towards outdoor cultivation to reduce costs. The Canadian cannabis player has the goal of generating up to 200,000 kgs from outdoor harvests alone, or nearly double the indoor production target.

The ability to lower costs per gram sold will be crucial to success in this industry. CannTrust had costs right around $3 per gram in Q4. The company saw a 50% reduction from last Q4, but a big player like Aurora Cannabis (ACB) has goals of reducing cash costs below $1 per gram. According to industry analysts, outdoor cannabis can be cultivated at a 20% discount to greenhouse crops suggesting CannTrust is on the right path with the majority of their targeted annual capacity by 2020.

As with most players, these short-term results make the stock difficult to judge when CannTrust only sold 3,407 kilograms of dried cannabis equivalent with goals of producing 20x the amount per quarter by the end of 2020. Even at just C$4 per gram that provides for even lower wholesales prices, the company would produce revenues in the C$400 million range (or $300 million based on exchange rates).

Takeaway

The key investor takeaway is that CannTrust is a more interesting stock down around $8 with a market cap of only $800 million. The stock has already lost some of the excitement surrounding the uplisting to the NYSE while now trading at a more reasonable multiple.

The market is overlooking the ability of CannTrust to generate substantial sales this year on the big boost in cannabis production this year including the expected legalization of the edibles market in Canada later this year. The stock only trades at about 3x expected 2020 annualized sales estimates before even factoring outdoor cultivation.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

 

Disclosure: The author has no position in CTST. The information contained herein is for informational purposes only.