Cannabis Corner: The Fundamentals Got Better

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Few things make me happier than seeing a great stock that once looked too frothy sell down to more reasonable levels through no fault of its own. Every one of those conditions is coming true in Big Cannabis right now.

Let’s start with “no fault of its own.” Once again, CannTrust Holdings Inc. (NYSE:CTST) melted down this week, taking its innocent competitors with it.

The guilt all belongs to CTST and its management’s failure to comply with Canadian growth regulations. That stock has an extremely good reason to be down 55 percent since July 5.

But the CTST management team had nothing to do with Aurora Cannabis Inc. (NYSE:ACB), Tilray Inc. (NASDAQ:TLRY), Cronos Group Inc. (NASDAQ:CRON) or Canopy Growth Corp. (NYSE:CGC), all of which are down in sympathy.

I understand if investors new to this space and watching CTST are retreating from the threat of contagion, the notion that one company’s problems cast a fundamental shadow across an entire industry.

Sometimes a receding tide will leave all boats high and dry. However, the cannabis tide isn’t receding. And a cultivator in trouble is an opportunity for everyone else to absorb its business and emerge stronger than ever.

Whether CTST keeps its license or not, the legal status of the harvest in its greenhouses now has been tainted. The Canadian government will confiscate and likely destroy every gram that corporate records can’t confirm grew under approved conditions.

That’s 17 million grams of cannabis worth about $73 million. Other suppliers with cleaner records will need to step up to cover the shortfall. If they make CTST customers happy, the market share they gain will be permanent.

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For them, this isn’t a disaster. It is a veritable windfall. And harvest is only a few months away, so the clock is ticking on what will happen to that $73 million in cannabis CTST was getting ready to sell.

The cultivators tied most strongly to Canada, ACB and CGC in particular, need to show us a clean audit to dispel the shadow that they’re tainted, too. In that scenario, there’s no reason either stock should be down 10-15 percent this week.

They’re probably going to reap most of the rewards of exploiting a weakened competitor. Once that happens, even short-term investors can benefit from a bounce.

That’s the kind of bounce I’ve been waiting to capture in my Turbo Trader Marijuana Millionaire Portfolio. We only need a little more evidence that Big Cannabis stocks have once again hit bottom.

And in the long term, of course, the outlook hasn’t budged one cent. All this news does is accelerate the path the strongest companies will take to achieve big revenue gains and, ultimately, profitability.

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