Big Canadian marijuana growers get plenty of attention. But there are dozens of smaller ones that don't make headlines nearly as often. Two that investors might want to check out are CannTrust Holdings (NYSE:CTST) and Supreme Cannabis (NASDAQOTH:SPRWF).
Neither of these stocks has performed very well so far in 2018. CannTrust's share price is down 17%, while Supreme Cannabis stock has dropped 19%. But past performance isn't necessarily indicative of future results. Which of these two marijuana stocks is the better pick for investors now?
There are four key factors that I think investors should look at when evaluating Canadian marijuana growers: production capacity, financial position, readiness for the Canadian recreational marijuana market, and position in the global market. Here's how CannTrust Holdings and Supreme Cannabis stack up against each other in each of these categories.
CannTrust Holdings has two facilities for growing cannabis. One in Vaughan, Ontario, contains 60,000 square feet of growing space. The company also now has a 450,000-square-foot facility in Niagara. CannTrust has also started construction of 600,000-square-foot expansion that, when complete, will bring its total annual production capacity to more than 100,000 kilograms.
Supreme Cannabis recently announced that it had obtained Health Canada approval to another 30,000 square feet at its 7ACRES facility in Kincardine, Ontario. This addition should double the facility's annual production capacity to 10,000 kilograms. However, the company has an even larger expansion project under way that is expected to increase annual capacity to 50,000 kilograms by the end of 2018.
CannTrust's revenue totaled $7.8 million in Canadian dollars in its last quarter. The company posted a profit of CA$11.4 million with help from a big positive adjustment in the fair value of biological assets included in inventory that was sold, making it the company's third consecutive quarter of profitability. CannTrust reported nearly CA$20.9 million in cash and short-term investments as of March 31.
Supreme Cannabis reported revenue of nearly CA$2.1 million in its last quarter. However, it announced a net loss of nearly CA$3.4 million. The company had a cash stockpile of CA$78.5 million as of March 31.
Readiness for the Canadian recreational marijuana market
Canada's market for the adult use of recreational marijuana is scheduled to open in October. Many expect that there will be high demand right out of the gate. At least initially, supply from the country's marijuana growers likely won't keep up with demand. That should mean great opportunities for companies that can deliver on the production capacity that they're projecting.
CannTrust hasn't announced any supply agreements with provinces for retail cannabis. However, Supreme Cannabis signed supply agreements with Alberta, Manitoba, and entered into a memorandum of understanding with British Columbia to supply marijuana for the adult-use market.
Position in the global marijuana market
The problem with relying solely on the domestic marijuana market in Canada is that supply will eventually exceed demand. Marijuana growers with international operations will be in better shape to navigate the rough waters that the Canadian supply glut could cause.
CannTrust partnered with Stenocare to market cannabis products in Denmark. The company has also exported medical marijuana to Australia. CannTrust announced its intention to ship to Germany, Brazil, and Mexico. So far, though, no progress has been reported on this goal.
Supreme Cannabis announced plans earlier this year to buy a stake in a cannabis producer in Lesotho. This move positions the company to enter the larger South African medical marijuana market, assuming the country moves forward with legalization efforts. Supreme Cannabis also has stated that it "regularly considers opportunities in emerging cannabis markets" where marijuana is legal at the federal level.
Better marijuana stock
You might have had a difficult challenge if you attempted to keep score between these two marijuana stocks in each of the four categories addressed. CannTrust has a clear advantage in capacity. The company is also profitable, whereas Supreme Cannabis isn't. However, Supreme Cannabis has more cash, which is very important. It also has supply agreements with three Canadian provinces for the adult use market. On the other hand, CannTrust might have an edge in positioning for the global marijuana market.
Do we have a toss-up? I don't think so. One area that we didn't address was valuation. CannTrust is one of the cheapest marijuana stocks around. That doesn't mean the stock is priced attractively, but it is at least relatively less expensive than most other Canadian marijuana growers. Because of this -- and its higher capacity -- my view is that CannTrust is the better choice between these two stocks.
However, I do have a serious concern about CannTrust that prevents me from calling the stock as a definite pick for investors to buy. When the supply glut hits in Canada, I suspect that many smaller marijuana growers won't be able to compete as effectively as larger companies. This could create a "squeeze" scenario where some smaller players get gobbled up by larger entities at bargain prices.
Could CannTrust turn to global markets to prevent being squeezed out at home? Maybe. But the company's international efforts pale in comparison to what some of the bigger marijuana growers are doing. I could be proved wrong, but my fear is that CannTrust, along with many other small marijuana stocks, could be in for a rude awakening down the road.