Canada has been on a steady march to legalize recreational marijuana, culminating in a historic Senate vote a few weeks ago. However, quite a few Canadian marijuana stocks have lost ground so far in 2018. Two year-to-date losers are Cronos Group (CRON 1.63%) and CannTrust Holdings (CNTTF +0.00%). Cronos stock is down around 20%, while CannTrust's share price has fallen more than 10%.
But will the future look brighter for these beaten-down marijuana stocks? And, if so, which is the better choice for investors? Here's how Cronos Group and CannTrust Holdings stack up against each other.
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The case for Cronos Group
If you're a value investor, you might want to sit down and back away from any heavy machinery. Cronos Group has a market cap of nearly $1.2 billion, and the company made a grand total of $4.9 million over the last 12 months. You're not going to want to buy this stock for its bargain price. But the potential for growth could be a different story.
Cronos Group has three key avenues for growth. One is supplying medical cannabis in its home country of Canada. Another is selling cannabis for the Canadian recreational adult-use market. And the third is targeting the global cannabis market.
The company is already growing by leaps and bounds in the domestic medical cannabis market. In its Q1 update, announced in May, Cronos reported a whopping 473% year-over-year jump in sales.
It remains to be seen how successful Cronos will be in the Canadian recreational market, but the company has definitely been gearing up for it. Cronos has cranked up its production capacity in anticipation of higher demand. The company also partnered with MedMen to open retail cannabis stores in Canada. MedMen is a leader in the U.S. cannabis industry.
Cronos has also taken steps to leap into international markets. The company signed an exclusive supply agreement with pharmaceutical distributor Pohl-Boskamp to serve the German medical cannabis market. It formed a partnership to supply medical cannabis to the Australian, New Zealand, and Southeast Asian markets. And just a few days ago, Cronos announced a distribution deal with Delfarma for Poland's medical cannabis market.
How much can Cronos Group realistically grow? I'm not sure. Arcview Market Research and BDS Analytics think the global cannabis market will reach $57 billion by 2027. If Cronos could capture even 1% of that market, the stock should have room to move higher.
The case for CannTrust Holdings
Value investors should be OK to stand up before hearing about CannTrust, but you still might want to avoid the heavy machinery. CannTrust's market cap is more than $630 million. The company's trailing-12-month revenue was $19.2 million. Believe it or not, CannTrust is one of the cheapest marijuana stocks on the market.
CannTrust has the same opportunities before it that Cronos does. The company already is doing well in the Canadian medical cannabis market, reporting a 158% year-over-year sales jump in the first quarter of 2018. Three-fifths of CannTrust's revenue stems from cannabis extracts, which are more profitable than dried cannabis.
The company plans to launch three recreational cannabis brands for the adult-use market once it opens throughout Canada in October. Like other marijuana growers, CannTrust has scrambled to add production capacity. The company recently opened a 450,000-square-foot facility in Niagara. CannTrust has also started construction of another facility that, when complete, will bring its total annual production capacity to more than 100,000 kilograms.
But is CannTrust positioning itself for the larger global market? To some extent. The company has already begun shipping medical cannabis to Australia. In March, CannTrust launched a partnership in Denmark wth medical cannabis producer Stenocare.
CannTrust has also stated that it's eyeing opportunities in Germany, Mexico, and Brazil. So far, however, there have been no announcements of progress in these countries.
Better marijuana stock
Both Cronos Group and CannTrust Holdings should enjoy a surge in revenue once the recreational marijuana market opens in October. Which stock is more likely to perform better over the next year? My hunch is that it will be CannTrust.
As mentioned earlier, CannTrust is more attractively valued than most marijuana stocks. As the company ramps up its capacity, I think its sales will rise faster than many other marijuana growers as well.
However, I do have a concern that smaller Canadian marijuana growers that don't have established international distribution channels could be in trouble when demand catches up to supply in Canada. For this reason, I don't view CannTrust as a smart pick for long-term investors. I think that there are plenty of stocks with better risk-reward propositions.
