CannTrust Holdings Inc (TSE:TRST) Misses Revenue Targets & SAFE Banking Act: Ben Smith’s Market Wrap

Midas Letter Lead Financial Writer Ben Smith dissects what CannTrust Holdings Inc’s (TSE:TRST) (NYSE:CTST) (FRA:C9S) recent financial reporting means for the company and the cannabis space more broadly. Smith notes that CannTrust typically hits its targets and had been trading near recent highs. As a result, the news that CannTrust missed its targets acted like a “bombshell to the market.” Smith cautions investors to pay attention to the news flow in the sector and not just individual names. In addition to CannTrust’s missed revenues, there have also been four downgrades in recent weeks, including Cronos Group Inc (TSE:CRON) (NASDAQ:CRON) (FRA:7CI). Smith emphasizes that the current cannabis news cycle is not conducive to multiple expansions in the sector. Smith also addresses the SAFE Banking Act, which would reform banking laws in the United States and would make it easier for US MSOs to access capital. While the legislation has made it through committee, Smith feels it is highly unlikely to be passed before Q4 2019.

Transcript:

Howard Glassman:   Benjamin, you were just talking about CannTrust earnings hitting the stock hard. It’s – what are your thoughts, because I know a lot of people are waiting to hear what you have to say about this.

Benjamin Smith:    Yeah, so CannTrust earnings, I think, delivered a little bit of a bombshell to the market, just because investors aren’t used to CannTrust missing. Traditionally, they’re, you know, one of the best-performing stocks companies in terms of financial reporting; they usually hit their numbers, they usually do pretty well. I think the last financial report, Q3, that came out in November, they absolutely hit it out of the park, and even though the market had been trending down and had been, you know, in the heart of the post-legalization selling, CannTrust, you know, was up double digits that day on a percentage basis.

So this came as a little bit of a surprise, especially if you look at the chart. You can see that there was no, you know, frontrunning in the stock; there was no pre-selling. So the stock had been trading near its, you know, recent highs, so a lot of people, there’s a lot of expectations baked into the cake, and unfortunately, you know, they missed the revenue number by 4.5 million or thereabouts on the consensus basis, and their gross margins were nowhere near what analysts expected them to be. So you see the result today.

Howard Glassman:   Was this a surprise to you, when you saw this?

Benjamin Smith:    A little bit, because like I said, CannTrust usually, you know, hits all their numbers. They usually meet, and you know, last quarter they hit it out of the park. And you know, generally, they usually get a pretty good reaction, and they’re known on The Street and with investors for being a, you know, a sound performer with their financial metrics. So this is the first time CannTrust has really, you know, taken a hit after a quarterly earnings report – this was also their full-year report. So I would say I was a little bit surprised, yes.

Howard Glassman:   Okay, yesterday we talked a little bit about the HMMJ and US stocks, kind of soft. You tell us now there’s been a bit of a return, a bit of an uptick?

Benjamin Smith:    Yeah, well, you know, the CannTrust news delivered a sort of a one-two punch coming off the heels of Cronos’ downgrade yesterday, so the market, you know, started off very weak this morning, but you know, there’s been a lot of buying – you know, pretty impressive buying off the lows. Currently HMMJ is only about 2 percent down on the day. It was a good 5 percent down to start, so people are, investors are buying a lot of the baskets of stocks. They’re taking this weakness to add to positions, which is, you know, pretty good. And you know, that being said, HMMJ has faced some technical damage over yesterday, and you know, we can’t say that it’s really strong, you know, over the past couple weeks.

We won’t be able to make that determination until it starts outperforming the broad market indexes by, you know, 2 times or more, when it turns around. That’s when we can really say that, you know, the basket of Canadian marijuana stocks is really strong.

Howard Glassman:   Okay, I’m not sure if you’re familiar with Ed, but, hello – but Ed is here with a question, and just be kind to Ed, because right now he’s got a bit of a cold, he may be hungover, and there’s rumour that he may have contracted some syphilis? Some mold? I don’t know what he’s got. He’s old; it could be anything.

Ed Milewski:  It could be anything. So the question I have, and I don’t know if you’ve got the answer, Ben, but was what happened to CannTrust a one-off, or is it maybe, is it more indicative of a – is it a bigger concern? Should investors be really paying attention to quarterly results this year? Because this is reporting season. We’ve got Charlotte’s Web coming out at 4:00, Khiron’s coming out, but I don’t know the answer. We should pay attention, here, right?

Howard Glassman:   Is this part of a bigger picture? This is what I asked.

Benjamin Smith:    I haven’t really gotten into the report enough, the details enough, to really make that determination. I think investors, what really matters to investors, is to pay attention to the overall news flow in the sector instead of just individual stocks. So in the last, say, two, three weeks, we’ve had four individual stock downgrades based on valuation, and you know, CannTrust missed their revenue numbers by a good 20 percent, today. So none of this, you know, really is conducive to multiple expansion in the sector right now, so I think we, you know, the Canadian MJ space really has to get through this sort of negative overall macro news cycle that it’s experiencing, to really move forward.

And that’s why you’re seeing that the sector’s not really, you know, keeping pace. It’s underperforming the broad market indexes right now, and that’s not really a place where you really want to be, because, you know, if the indexes roll over, then there’s always the chance that, you know, cannabis could roll over by two or three times what the indexes are rolling over, right now.

So I think it’s a tough period right now, and you know, none of this should make investors lose focus of core positions for the future, but if you have discretionary capital, or if you’re looking to stake new positions in the market, I would say that, you know, you could in this environment, you could probably wait it out a little bit and see kind of what happens.

Howard Glassman:   Later on, we’re going to be talking to a professor from the department of political science at Wright State University, kind of on our next item that I wanted to talk to you about, which is the House Financial Services Committee voting in favour of moving safe banking through Committee. Now, we’ll talk to the professor about, you know, the minutiae of that in the States, but you know, you say, and I think you’re right, that this is the first of several steps to get the Bill into law – which is a huge sector catalyst in the States and in Canada, is my question?

Benjamin Smith:    Yeah, I think most investors view this as being, you know, a particularly big catalyst for the multi-state operators down south, but I would posit that it’s also a big catalyst for, you know, some of the Tier 1 Canadian LPs with cash in the bank. For example, Canopy Growth, which still has a good 4 billion left from its Constellation Brands deal. It would allow them to perhaps purchase some MSOs and really move to operate down in the States. It does have that potential. So I don’t think it’s just limited to, you know, MSOs, although I think they’re the – the primary catalyst lies there.

So overall, this is just a huge catalyst overall, but and today with the vote getting through Committee, we’re seeing it’s going to advance to the next stage. Investors have to realize, though, that this is a work in progress. It’s very unlikely any, you know, the State Banking Act will get passed, say, before Q4 2019; it could even linger into, you know, Q1, Q2, 2019. So this vote today was the very big positive. It was expected, and because it was expected and, you know, it’s sort of a longer-cycle thing, you didn’t really see the market react too positively on the news, even though it is. It is a very big positive.

So I think people are just sort of, you know, getting ready for, you know, the news cycle, which is really going to gear up when it goes to Congressional review, if it gets there. When it goes to the Senate, that’s when the big battles are going to take place.

Howard Glassman:   Well, and that was sort of the last item, and you’ve just talked about the MSOs not reacting really that robustly on the news because it’s too far out; but I just want to ask, when you think about, you know, we had all this run-up time to legalization, October of last year, and I’m assuming there’ll be a similar, you know, a couple of years out towards an eye to legalization. When that happens, and this could be a question for Ed, as well – when that happens, is that US marijuana market just going to swallow up the Canadian one? Anybody? Is that a dumb question? I don’t know.

Ed Milewski:  No, it’s a difficult question.

Howard Glassman:   Ben, why don’t you answer that first?

Benjamin Smith:    Yeah, you know, it’s a difficult question. I think obviously the US multi-state operators will be in a very good position at that point, because they’ll be able to most likely go to US exchanges, they’ll be in a way better position to raise more capital, so they’re going to be capitalized as most of the Canadian market.

I do see big opportunity in this for, you know, the bigger LPs with capital, specifically Canopy Growth, because they have that big cash wart to really make a move down in the States as well, if they’re allowed to. So I don’t think it’s limited to the MSOs, but I think overall they’ll be in better position because they have the bigger markets, they’ll be bringing in, you know, the bigger revenues, and at that point they’ll be able to raise capital all over the place. So yeah, it has the potential for them to be, you know, to gain a leadership position in the space, whereas, you know, the Tier 1 LPs are still considered the leaders right now. That may not always be the case, although I, you know, there’s a case to be made that Canopy Growth, Aurora Cannabis, and some of the high-end names here will always have a place at the table.

Howard Glassman:   Well, and Ed, you would concur, I’m assuming? It’s a difficult question. I mean, I think people have to start thinking about it, because news like this is an indication that the Americans may be with an eye toward our market. And the pressure, interestingly enough, coming from companies, not people. I’m sure there’s, yeah, there’s pressure from people, but what do you think of that?

Ed Milewski:  You know, I look at the marijuana thing – the problem I have with the marijuana thing, and that’s why I didn’t put money into it, was because I didn’t think there was a lot of barriers to entry. More and more people coming in makes the pieces of the pie smaller, right?

Howard Glassman:   Yeah, but it’s only the biggest that can really make any – I know what you’re saying, lots of people in the space, but it really is, as Ben was just saying, there’s a few big companies that are controlling a big part of this market, and when the Americans, you know, when that gold rush happens, you know, there might be – wouldn’t you say there would be some opportunities?

Ed Milewski:  Yeah, well, I just look at the valuation, and I was talking to a guy, my buddy here John in the office, about the market cap of the public companies in Canada. The market cap, and I look at, you know, the revenues that Cronos posted, which I thought were not that big relative to the market cap. Like, the company’s valued at – it’s priced for perfection going forward, it looks like to me. And the revenues aren’t that – you know, they don’t jump out at you.

Howard Glassman:   All right –

Ed Milewski:  And you need to see CannTrust backing off. So you know – and we saw the sector gave some ground back here over the last few days. I don’t know if that answers your question. I don’t know how this is all going to work out.

Howard Glassman:   Well, listen – Ben, thank you very much, as always. I appreciate the pre-show stuff; gives me stuff to read and learn about, and you have a great day. Congratulations on rocking the short sleeves here in late March, I like it.

Benjamin Smith:    All right, guys. I’ll see you tomorrow.

Original article: CannTrust Holdings Inc (TSE:TRST) Misses Revenue Targets & SAFE Banking Act: Ben Smith’s Market Wrap

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