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Why This Marijuana Stock's US Debut Was a Bust

By Dan Caplinger – Updated Apr 10, 2019 at 10:59AM

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Long-term investors shouldn't care about events like this -- if a business is sound.

2019 has been a great year for marijuana stocks so far, as investors are fully jumping into the bullish camp for the expansion of the cannabis industry over the long run. With many well-known cultivation companies reporting big ramp-ups in revenue thanks in large part to the late-2018 opening of the Canadian recreational cannabis market, the potential for further sales gains seems limitless.

Cannabis companies are taking full advantage of the interest in their stocks, making moves to make it easier for investors to get access to their shares. On Feb. 25, CannTrust Holdings (CNTTQ) became the latest company to list its shares on the prestigious New York Stock Exchange. Yet for those who had expected that the marijuana producer's move would bring a surge in its share price, CannTrust's NYSE listing came as a huge disappointment -- and revealed a fundamental misunderstanding that many investors have about moving to major U.S. exchanges.

Wood table with scoop and jar containing dried cannabis leaf.

Image source: Getty Images.

A disappointing drop for CannTrust shares

CannTrust's first day of trading on the NYSE didn't go the way that many had hoped. Shares initially jumped about 3% at the open and eventually climbed to a 5% gain early in the first-day session. Yet at that point, selling pressure came in, and the stock eventually closed almost 6% lower.

Since then, CannTrust's shares have seen typical ups and downs, but without a particularly wide range of movement. Even after having clawed back some of its losses, the marijuana company's stock price remains below where it started the week.

Many marijuana market participants were quick to see the downward price move as criticism of CannTrust's business model and future prospects. But there were some other factors involved in the decline:

  • It's important to remember that just because CannTrust shares first became available on the NYSE on Feb. 25, they were traded elsewhere before that. In the week leading up to CannTrust's NYSE listing, those shares climbed 18%. In that light, the subsequent decline only gave back a portion of the rise in the share price before the listing.
  • CannTrust wasn't the only marijuana stock to suffer declines that day. Cronos Group saw its shares fall 8% due to negative comments from stock analysts. Tilray had a more modest drop of 2%.

Perhaps most importantly, trying to judge a stock's performance over the course of just a few days is rarely helpful. Short-term traders have so many different motivations for their moves that they can overwhelm whatever impact long-term investment decisions have on the stock price. It takes time for the fundamental strength of a business to shine through.

Is CannTrust destined for greatness?

In assessing CannTrust's fundamental prospects, it's useful to look back at what was a highly momentous 2018 for the company. CannTrust opened a portion of the vast growing space at its Niagara Greenhouse facility, adding 450,000 square feet to dramatically boost the total capacity of its cannabis growing operations. When Niagara is complete, it'll encompass more than 1 million square feet, and CannTrust expects to produce more than 100,000 kilos of cannabis annually as a result.

In addition, other moves helped to show CannTrust is a major player in the market. Four consumer brands, including the ideally named Peak Leaf brand, will target various categories of marijuana users, and CannTrust made efforts to offer alternative products beyond dried cannabis and pre-rolled joints. New CEO Peter Aceto took the reins as well, and his business savvy has made a big difference even in his first few months as chief executive.

Finally, CannTrust has some attractive attributes that many of its marijuana peers lack. Revenue levels are already comparable with stocks that have significantly higher market capitalizations, and CannTrust has been more successful in generating high margins. That's largely due to the company's attention to product mix, and that has the dual benefit of also differentiating CannTrust's product lines from those of its rivals.

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Keep an eye on CannTrust

CannTrust's move to the NYSE might not have brought an immediate reward for shareholders, but it reflects the cannabis company's improving prospects. Now that investors have greater access to the stock, CannTrust will be much more on their radar going forward -- and that should pay off if the marijuana producer keeps enjoying the success it's seen so far.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends CannTrust Holdings Inc. The Motley Fool has a disclosure policy.

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