The anxiety of investors in the cannabis space heightens every time a sordid tale about a cannabis company comes out. On March 28, it was the turn of CannTrust Holdings (TSX:TRST)(NYSE:CTST) to report Q4 2018 and full-year earnings. While the both the top-line and year-over-year growth were impressive, the stock still fell 18.95%.
CannTrust’s sales growth is stellar but is analogous to the situation of the bigger industry players. Again, investors are frustrated about the bottom line, which is the real gauge of performance. The fourth-quarter sales growth yielded a net loss of $25.5 million and a dismal $6.2 million net income. The saga of discontent continues.
Eroding gross margins
Investor confidence in the cannabis sector continues to erode. You can’t blame others who see weed stocks as nothing more than a pump-and-dump play. While nearly all cannabis producers reported astronomical growth sales, losses are enormous as well. There’s still no solid business case at the start of Q2 2019.
On a full-year basis, CannTrust’s net loss amounted to $13.5 million versus a $6.8 million net income in 2017. In terms of EPS, the company reported a loss per share of $0.26 in the fourth quarter compared to $0.08 for the same period in 2017. Judging by the reported earnings of industry peers, the losses were somewhat expected.
The declining gross margin is adding insult to injury. CannTrust’s gross margins in the fourth quarter barely improved (34% to 35%) from a year ago. But on a full-year basis, the 6% contraction in gross margins (from 63% to 57%) was quite telling. CannTrust’s cash cost per gram fell sharply from $5.16 in Q4 2017 to $2.94 in Q4 2018.
On the wholesale side, which includes recreational cannabis, CannTrust sold about 1.2 million grams of dried cannabis during the fourth quarter and extracts of about 104 thousand grams. For the first time, the wholesale segment brought in sales Q1 2019. Dried cannabis and extracts were sold for $4.20 and $3.90 per gram, respectively.
But pricing can become a major factor in the future. The only way to achieve economies of scale is to double or triple production capacity, which the company is currently working on.
Across the border, investors also punished the stock of the newly listed weed company on the NYSE. The erosion in gross margin didn’t sit well with them despite the revenues doubling year over year.
Not a strong buy
Back home, there are bullish sentiments. Some analysts see a potential +29.07% increase to $12.74. The recommendation trend is a buy but not a strong buy. The current price is at par with its 200-day moving average of $9.94. However, blowing past the 50-day moving average of $11.72 might be a struggle.
Caution is advised as the cannabis sector appears more volatile than the general market. As for CannTrust, profitability can come sometime late 2020 when peak annual output reaches 200,000 kilos. Thus, be circumspect and scratch out the stock from your shopping list for now.
You might be missing out on one of the biggest opportunities in Canadian investing history…
Marijuana was legalized across Canada on October 17th, and a little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.
Besides making key partnerships with Facebook and Amazon, they’ve just made a game-changing deal with the Ontario government.
One grassroots Canadian company has already begun introducing this technology to the market – which is why legendary Canadian investor Iain Butler thinks they have a leg up on Amazon in this once-in-a-generation tech race.
This is the company we think you should strongly consider having in your portfolio if you want to position yourself wisely for the coming marijuana boom.
More reading
- 3 Marijuana Stocks That Could be the Next Canopy Growth (TSX:WEED)
- TFSA Investors: Spike Your April Profits With These 3 Panic-Stricken Stocks
- Is CannTrust Holdings Inc (TSX:TRST) a Buy After Dropping 20% Last Week?
- Top Stocks for April 2019
- Why Did CannTrust Holdings (TSX:TRST) Stock Fall 19% on Thursday?
Fool contributor Christopher Liew has no position in any of the stocks mentioned.
Source: The Fool
Scratch Out This Weed Stock From Your Shopping List
The Fool
In all we do, we take a different approach.
We believe – and have proven over decades – that the individual investor can beat the market.
We believe that anyone can do it, even if they don’t have a lot of time or money to devote to investing.
We believe in a long-term outlook, helping people build wealth over time.
We believe that the person best positioned to take care of your financial future is you.
And we work tirelessly on behalf of our hundreds of thousands of members who are enjoying the opportunities that come with having enough money to do the things that matter to them.
While we are headquartered in Alexandria, Va., The Motley Fool advocates for the individual investor around the globe with offices in the UK, Australia, Canada, Singapore, and Germany.
