The cannabis industry had a truly unforgettable year in 2018, even if pot stocks didn't generate the gains investors had hoped for.
In the U.S., a handful of states legalized marijuana in some capacity, the U.S. Food and Drug Administration approved its very first cannabis-derived drug, and President Trump signed the Farm Bill into law, legalizing hemp and hemp-based cannabidiol (CBD) oil. CBD is the non-psychoactive cannabinoid best known for its perceived medical benefits.
Of course, the biggest news was the lifting of the curtain on nine decades of recreational marijuana prohibition in Canada. As of Oct. 17, 2018, adult-use pot became legal for sale in dispensaries and online sites in our neighbor to the north. Although it's going to take a few years for the industry to get fully up to speed, it could be generating $5 billion or more in added annual sales soon enough. It's this validation of marijuana as a legitimate business model that really stood out in 2018.
These two marijuana stocks are making the move to the iconic NYSE
In 2019, the validation of the cannabis industry will continue. Within the past three weeks, two Canadian pot growers, HEXO (NYSE:HEXO) and CannTrust Holdings (NYSE:CTST), have filed the paperwork needed to uplist their common stock from the over-the-counter (OTC) exchange to the New York Stock Exchange (NYSE).
Why uplist? The simple reason is that it demonstrates the legitimacy of the legal weed industry. By listing their shares side by side with other time-tested businesses on the NYSE, HEXO and CannTrust will be demonstrating not only that they meet the requirement to list on the iconic exchange, but also that their businesses offer the potential for growth over the long run.
In addition, listing on the NYSE will roll out the red carpet for institutional investors. Not all investment banks are willing to cover and/or invest in companies listed on the OTC exchange. By moving to the NYSE, HEXO and CannTrust will be far more welcoming to coverage from Wall Street firms and investment.
Mind you, this won't be the first rodeo for pot stocks on a major U.S. exchange. Before HEXO and CannTrust, which haven't been approved for NYSE listing yet, but are likely to be, in my view, Cronos Group uplisted to the Nasdaq, with Canopy Growth, Aurora Cannabis, and Aphria making the move to the NYSE.
HEXO and CannTrust could bring something new to the NYSE
However, there could be some degree of uniqueness should HEXO and CannTrust get the OK to upslist -- namely, they could become the first pot stocks to uplist and generate an operating profit. Whereas Aurora Cannabis has been generating a bottom-line profit in recent quarter, it's been the result of fair-value adjustments on investments. In its most recent quarter, Aurora lost nearly $112 million Canadian on an operating basis. Very few pot stocks are profitable purely on an operating basis, with one-time benefits and expenses excluded. CannTrust and HEXO could be among the first to change that.
HEXO has two catalysts that could push it to profitability. First, it has a mammoth long-term supply deal with the SQDC, the regulatory boy that controls the sale of cannabis in Quebec. Signed last year, HEXO will deliver 200,000 kilograms of weed to Quebec over the next five years, with the amount supplied increasing each year. By the time the fifth year rolls around, roughly half of HEXO's projected 108,000 kilograms at peak annual capacity will be gobbled up by Quebec. That creates plenty of cash flow predictability.
HEXO's second catalyst is its August-announced joint venture with Molson Coors Brewing (NYSE:TAP). The partnership will see Molson Coors and HEXO teaming up to research and develop a line of cannabis-infused beverages in the domestic Canadian market. Molson Coors will bring its marketing expertise and deep pockets to the table, with HEXO providing its knowledge of the pot industry. It's worth noting that infused beverages aren't yet legal, but they could be by as early as this coming summer, when Parliament considers new consumption options.
As for CannTrust, its secret to success is its growing method. CannTrust's Niagara and Vaughan facility rely on hydroponics, or the growth of plants in a nutrient-rich water solvent as opposed to soil. In CannTrust's case, it has access to low-cost water and electricity, which should lead to very promising yields and exceptionally low-cost production. At its peak, CannTrust should produce right around the same amount annually as HEXO.
The biggest wildcard for CannTrust is the third and final phase of its Niagara greenhouse expansion. Having completed 450,000 square feet already, the final 600,000 square feet of expansion has been held up by permitting issues. If CannTrust can quickly resolve these issues, it shouldn't have much problem turning an operating profit relatively soon. However, if this permitting issue drags on, CannTrust may opt for other capacity expansion options that aren't as cost-effective. It's something to closely monitor in 2019.
In my opinion, HEXO and CannTrust won't be the last pot stocks to uplist in 2019.
Check out the latest CannTrust earnings call transcript.