Cannabis Corner: Cash is King

Hilary Kramer

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

This week was another rough one for Big Cannabis, with the core group of eight stocks I track down 6 percent in the aggregate.

Until today, only two were able to defy the red tide and continue their recent rebound. One was the biggest and best capitalized, Canopy Growth Corp. (NYSE:CGC).

But as big stocks sold off today, CGC lost its grip on a win. It will come back. After all, there’s $2.7 billion on the balance sheet.

Factor out debt and shareholders are still looking at $5 billion of book value. With $400 million a year coming in and a steep sales growth curve, it justifies its $10 billion market capitalization nicely.

All we need there is for CGC to reach a size where sales generate profit instead of empty cash flow. Maybe that’s this quarter. Results come out in two weeks.

Every smaller cannabis producer needs to reckon with similar math. Most are still a long way from breaking even. The clock is ticking every day.

And until they cross the finish line, investors will remain hesitant. Why buy a cannabis copycat unless you can see the leader doing well?

In the meantime, these companies will trade on the balance sheet. That’s why only battered CannTrust Holdings Inc. (NYSE:CTST) ended this week in positive territory.

The company confirms that it has $175 million in cash. It is only a $200 million stock right now. The gap is narrow enough that, even in a catastrophe, management should be able to find a way to close it and make shareholders whole.

While the upside for CTST may no longer be stratospheric, the risk seems to be off the table now. When a stock hits bottom, it may not bounce much immediately… but you’re unlikely to suffer much more.

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