Momentum investors are a notoriously impatient bunch. Most of us expect to buy a stock on Monday, then kick-back and watch that stock double or triple in price over the ensuing days. But despite what you see and hear on CNBC, Twitter and the mainstream financial media, overnight triple-digit gains aren’t realistic.
An unfortunate reality for typically short-sided momentum investors is that companies and industries don’t mature and develop in lockstep with the movement of their stock price.
You see, many investors look back at the growth of the cannabis industry in 2018 and wonder why their investments aren’t already producing triple-digit returns.
After all, the past 12 months have given us an adult-use recreational market in California, federally legalized marijuana in Canada, federally legalized hemp in the US, a recommendation from the World Health Organization that CBD no longer be controlled, and an increasing number of US state legislatures that support some degree of cannabis reform.
But that’s not all.
The fact that Utah, an overwhelmingly conservative state known for its strict alcohol laws, voted to approve medical marijuana in the 2018 midterm elections is an undeniable sign that the American public is ready for widespread cannabis reform.
Now, with all these overwhelmingly positive developments, why aren’t cannabis stocks exploding higher?
Simply put, because the initial wave of hype and euphoria that engulfed the cannabis industry in 2017 and 2018 has subsided. And 2019 will usher in an era where brand development, legitimate business models, and revenues determine investment gains.
Put another way, the cannabis industry is maturing.
Turning over rocks
If you’ve spent any time at all over the past six months studying the cannabis industry, you’re no doubt already familiar with multi-billion operators Canopy Growth, Aurora, Cronos, and Tilray. And it probably didn’t take you long to realize that like any burgeoning industry, many of the small companies in the space aren’t worth investing in.
However, if you turn over enough rocks, you often find an undiscovered small-cap gem with the potential to grow into one of the industry’s major players. And with CannTrust Holdings (TSE:TRST) (OTCMKTS:CNTTF), I believe we have found one of tomorrow’s power players.
Headquartered in Vaughan, Canada, the $590 million CannTrust Holdings is a licensed producer and distributor of medical and recreational cannabis in Canada. In addition to serving over 58,000 medical patients and an increasing number of recreational consumers with its dried, extract, and capsule cannabis-based products, CannTrust is also actively expanding its international presence via strategic partnerships.
As of January 1, 2019, CannTrust has partnered with Cannatrek Ltd in Australia, is involved in a joint venture with Stenocare in Denmark and is actively involved with Breakthru Beverage Group through Kindred Canada for recreational distribution in Canada.
And according to CannTrust’s CEO, Peter Aceto, who presented at the Benzinga Cannabis Capital Conference I attended on January 16, the company hopes to remain active when it comes to establishing international partnerships.
You can't sell what you don’t have
The legalization of recreational cannabis in Canada in mid-October 2018 created an issue many companies saw coming, but few were able to prepare for adequately – a lack of supply. And like any industry, distribution and production are essential to growing a business.
CannTrust has been actively trying to boost production. And for the most part, they’ve done an excellent job. Unfortunately, the company’s run into a few speed bumps at their Niagara Perpetual Harvest Facility in Pelham, Ontario.
Until recently, investors expected CannTrust to complete the phase two expansion of its Pelham facility during Q4 2018. But the company encountered delays and is now targeting the end of January for project completion.
The completion of phase two will provide CannTrust with 450,000 square feet of production space and allow the company to produce 50,000 kilograms annually.
The completion of phase three at CannTrust’s Pelham’s facility, which would double the company’s annual output to 100,000 kilograms, is being held up by a temporary moratorium on new cannabis-related development within town boundaries of Pelham. CannTrust still needs approval on ten outstanding licenses. And until those approvals are secured, the company can’t complete construction on the third phase of their existing facility.
In mid-December 2018, Aceto said this to James West of the Midas Letter:
“We’re in regular conversation with the Town of Pelham. We still think that our Phase III plans are very possible, that that can continue to go forward. That being said, we’ve got an obligation to our shareholders, and we need to drive our business forward, so we’re looking at alternative as well.”
The bottom line is in a perfect world, CannTrust would receive the permits they need and complete phase three of their Pelham operation ASAP. But even if this rosy scenario fails to unfold, the fact that management isn’t letting the grass grow under their feet is a sign that Aceto is moving the company in the right direction.
An awarding winning year
It doesn’t matter if we’re talking about cannabis or automobiles, every company wants to believe that their product represents their industry’s gold standard. But this isn’t kindergarten. And not everyone is going to be a winner.
But 2018 was without question CannTrust’s year.
And when Lift & Co. announced the winners of the 2018 Canadian Cannabis Awards (CCAs) at a black-tie event in downtown Toronto, CannTrust emerged as one of the industry’s most impressive rising stars by winning seven top awards, including the coveted Top Licensed Producer of the Year.
After more than 17,000 votes were counted, CannTrust won awards in the following product categories:
- Top High CBD Oil – CannTrust CBD Drops
- Top Balanced Oil – CannTrust 1:1 Drops
- Top Sativa Flower – CannTrust OG Kush
- Top Hybrid Flower – CannTrust Blueberry Kush
- Top High CBD Flower – CannTrust Cannatonic
While receiving awards and earning a reputation for putting out a great product is fantastic, the highlight for CannTrust came when the company was praised for their top notch customer service and was then recognized as The Licensed Producer of the Year.
Here’s what Aceto had to say upon learning of his company’s success at the Canadian Cannabis Awards:
“I am so proud to be part of this team. CannTrust is full of brilliant, caring people with great skill, who work collaboratively and care immensely about our patients and consumers but also our wonderful cannabis plants. What is so incredible about these awards is that consumers chose them.”
Aceto went on to note that the customer service recognition was especially important to him as CannTrust has always made a point of putting its customer’s needs first.
While awards and accolades don’t guarantee long-term success, they certainly don’t hurt. And if brand development and customer service are the keys to industry domination, CannTrust appears to have a leg up on much of its competition.
CannTrust began trading on the OTC Markets under the symbol CNTTF in late August 2017, and despite rising more than fivefold in its first five months of trading, the stock remained unknown to most investors.
Following CannTrust’s quiet, yet meteoric, rise in late 2017, the stock has slipped into a pattern of choppy and volatile consolidation.
CannTrust spent virtually all of 2018 rotating between $5 and $10. And today, with the stock trading at the lower end of its 12-month range (around $6.25) and the company’s Q4 2018 financial results expected soon, this may be the perfect time for cannabis investors to begin digging deeper into this industry leader.
The bottom line is barring a weekly close back under $4.50, I’d expect CannTrust to continue to trade within its $5 to $10 price band. But to sustain a break above $10 two things need to occur.
First, the company needs to successfully up list its shares to a major U.S. exchange. And given that CannTrust has already applied for NYSE listing, it’s realistic to expect an up listing to occur at some point over the next few months.
And second, CannTrust either needs to secure the necessary permits to complete the phase 3 buildout of its Pelham facility, or another low-cost production source must be identified.
Once both hurdles are cleared, I expect cannabis investors to adopt a notably more bullish stance on CannTrust.
--At the time of publication, Byrne had no positions in the stocks mentioned