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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

CannTrust (CTST): One Bad Sign for This Cannabis Stock


CannTrust Holdings (CTST) stock is down substantially as the company priced a large secondary far in the hole. The stock is interesting trading towards the lows of the last year in the $5 range, but the secondary should make investors have second thoughts about this cannabis stock.

Priced In The Hole

Back on April 22, CannTrust announced the intent to sell an aggregate of $200 million worth of shares with approximately 15% of the shares being sold by common shareholders. The stock was trading at $7.35 prior to this new bit.

As my previous article discussed, the company needed cash for aggressive expansion plans so investors shouldn’t be surprised that the company would need to raise cash. The initial concern was seeing some insiders cashing out $30 million worth of shares when the company and cannabis sector is in such a growth phase.

The company announced that the deal was priced at $5.50 or roughly 25% below the trading price when the secondary offering was proposed. The company raised $170 million in the offering and an additional $25 million is available via the over allotment.

The total offering is 36.4 million shares plus the over allotment at 5.5 million shares. In total, the company will sell 35.5 million shares and the selling shareholders at 6.3 million shares.

The problem for the stock is that the company and specifically the selling shareholders were so eager to cash out at one of the lowest prices in the last year. The stock traded up to $10 on multiple occasions and one could’ve seen another big run without insiders selling up to $35 million in the secondary.

CannTrust CTST stock chart

Business Update

The stock has a market valuation of about $900 million now after the offering. CannTrust is in a rather unique position of being listed on the NYSE and having such a small valuation, especially considering the valuation will include a cash balance of nearly $300 million prior to capital expenses for cultivation expansion in the works.

CannTrust plans to increase greenhouse capacity from the Q1 harvest of 9,424 kg to a goal of 100,000 kg per annum. In addition to the greenhouse space, the cannabis company plans to add a total of 200,000 kg in outdoor growing space with up to 75,000 kg this year from the outdoor growing space. The company has already bought 200 acres of land with expectations of annual cultivation of 1,000 kg per acre by 2020.

The Q1 cannabis sales rate was below 5,000 kg and will expand to possibly 75,000 kg per quarter by the end of 2020. The market has to contend with a 15-fold production capacity increase in a very short-time period where absorption of all of the additional supply has to raise some concerns. Hence, the insiders cashing out add to those concerns.

Takeaway

The key investor takeaway is that CannTrust has crushed the stock with the $200 million secondary offering. The smaller Canadian cannabis company needed the cash to expand production capacity from a 50,000 kg annual rate in the current quarter to at least 200,000 kg and up to 300,000 kg by the end of 2020.

Insiders cashing out at such a low price so early in the growth process is a bad sign, but the stock has been significantly beaten down to account for this red flag.

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

 

Disclosure: The author has no positions in CannTrust stock.

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