CannTrust is now oversold, this portfolio manager says

The buzz has worn off the cannabis sector since October’s legalization date, which means it’s time to go bargain hunting in the pot stocks. One easy pick would be Vaughan, Ontario’s CannTrust Holdings (CannTrust Holdings Stock Quote, Chart TSX:TRST), says Bruce Campbell of StoneCastle Investment Management, who says CannTrust ticks all the right boxes.

We’re getting close to two months into legal weed in Canada and while talk of store shortages has died down and public interest begins to turn towards the April 2019 opening of retail stores in Ontario, it’s the pot stocks who have faded into the background of late. The Horizons Marijuana Life Sciences ETF which tracks the sector across North America is now down a full 40 per cent from its all-time high set on October 16, the day before rec bud became legal.

That descent is mirrored by CannTrust’s share price which reached a high of $15.50 on October 16 but has been sliding ever since, currently trading at less than half that at $7.60 as of early Thursday.

But the stock is trading at a big discount and the company is solid, says Campbell, President and Portfolio Manager at StoneCastle, in conversation with BNN Bloomberg.

“It’s a past pick of mine and one that we really quite like,” says Campbell. “If you look at it from a pure valuation standpoint of sub-billion-dollar companies, it’s cheap: it trades in that 7x 2020 EV/EBITDA. If you compare it to the billion-plus group, which it sort of teeters around, those trade in the 30x area. So, it’s very cheap from a comparable valuation standpoint.”

“They have a distribution agreement into Germany, they also have this BrewBudz technology which will allow them to get into the US when things open up more there from a pure legalization standpoint, they have great production facilities and they have supply agreements. So, everything that we’re looking for, we’re seeing checks in the box,” he says. “It’s a bit surprising that it sold off so much.”

CannTrust released its third quarter ended September 30 financials on November 14, reporting record revenue of $12.6 million, more than double that of a year prior, while its active patients increased by 61 per cent to over 50,000. At the same time, the company saw its net income shrink by 36 per cent year-over-year to $421,240.

“We are extremely pleased with our Q3 results that are a testament to the success of this company and the incredible progress that we have made in such a short period of time,” said Eric Paul, Chairman of the Board, in a November 14 press release. “With the opening of the recreational market and the numerous opportunities that our Company is positioned to capitalize on, this is only the beginning.”

At the end of November, CannTrust took home a number of accolades at the Fifth-Annual Canadian Cannabis Awards, including Licensed Producer of the Year, Top Sativa Flower, Top Hybrid Flower and Top High CBD Oil.

Campbell says that TRST’s drop in price may be connected to investors getting impatient for a US stock listing, a stated intention of the company.

“I think there was some anticipation of their US listing, which we still haven’t seen,” he says. “There was some sort of gamesmanship there on when people thought the US listing was going to happen and the stock ran way up and has since pulled back with the sector, and then probably as that US listing hasn’t happened, you’ve seen a number of US investors move onto something else, because the money tends to be fairly fast in the sector.”