Better Cannabis Stock: CannTrust Holdings vs. Charlotte's Web Holdings
Keith Speights, The Motley Fool
Updated
You might lump both CannTrust Holdings(NYSE: CTST) and Charlotte's Web Holdings(NASDAQOTH: CWBHF) in the "double-to-trouble" club. Both stocks more than doubled earlier this year but ran into trouble that caused most of the gains to evaporate. CannTrust and Charlotte's Web announced quarterly results that disappointed investors.
Don't dismiss the prospects for either of these stocks, though. They both should have significant growth opportunities. But which is the better cannabis stock? Here's what you need to know about CannTrust and Charlotte's Web.
Cannabis leaves with bottle and dropper for CBD oil
Image source: Getty Images.
The case for CannTrust
Probably the best argument for buying CannTrust shares right now is that the stock looks like a pretty good bargain compared to many of its rivals. Granted, nearly every cannabis stock looks expensive because lofty growth expectations are baked into the share prices. CannTrust is no exception, but there are several reasons to like the stock at its current price.
CannTrust is on course to rank among the top cannabis producers in terms of production capacity. The company will only have an annual production capacity of 50,000 kilograms after the phase 2 expansion at its Niagara facility wraps up this summer. However, CannTrust's capacity will double to 100,000 kilograms when the phase 3 expansion at the facility completes in the third quarter of 2020.
That's just the start for CannTrust, though. The company plans to grow cannabis outdoors on more than 81 acres in 2019 and ramp up its outdoor cultivation to more than 119 acres by next year. CannTrust anticipates its total annual production capacity will reach up to 200,000 kilograms by the end of 2020. Beyond that point, the company estimates that its capacity could increase to as much as 300,000 kilograms.
This tremendous outdoor production should enable CannTrust to grow cannabis for extraction of cannabinoids, including CBD, at really low costs. The company already ranks as the market leader in cannabis oils in the Canadian medical cannabis market. Cannabis extracts are likely to become increasingly important with Canada expected to open the next phase of its adult-use recreational cannabis market later this year by allowing the sale of cannabis edibles and other derivative products.
CannTrust should be in a pretty good position to grow in the Canadian market. The company is one of only four cannabis producers to ink supply agreements with all 10 Canadian provinces. CannTrust teamed up with Breakthru Beverages, the leading alcohol distributor in Canada, and retail operator National Access Cannabis to reach the consumer market. It also partnered with Apotex, Canada's largest generic drugmaker, to develop and market medical cannabis products.
In addition, CannTrust could gain momentum in international medical cannabis markets. The company owns stakes in Australian cannabis distributor CannaTrek and Danish medical cannabis importer Stenocare.
The case for Charlotte's Web
Charlotte's Web has at least one big advantage over CannTrust: It operates in the U.S. And not only does Charlotte's Web operate in the U.S., it also claims the No. 1 brand on the U.S. hemp CBD market.
Estimates on just how big the U.S. hemp CBD market could become vary. Cannabis market researcher Brightfield Group projects a market size of $22 billion by 2022. Hemp Industry Daily estimates that the U.S. hemp CBD market will be between $6.1 billion and $7.5 billion by 2023. One thing everyone agrees on, though, is that there's a lot of growth in store.
Charlotte's Web appears to be in great shape to grow as the overall market expands. The company boosted its hemp production capacity from 63,000 pounds in 2017 to 675,000 pounds in 2018. It currently has a 40,000-square-foot manufacturing and research and development facility but adding another 137,000 square feet this year.
The company's hemp CBD products are sold in more than 6,000 retail locations throughout the U.S. That number is likely to increase significantly in the future as Charlotte's Web lands more deals with national chains. The company also has a major online presence: E-commerce sales generated 55% of total revenue in fiscal year 2018.
U.S. legalization of hemp in December 2018 opened up a tremendous opportunity for Charlotte's Web. Once the U.S. Food and Drug Administration (FDA) finalizes regulations for hemp CBD products, that opportunity could become even greater by clearing the way for the company to develop and market foods infused with CBD.
Better cannabis stock
I like the long-term prospects for both of these stocks. If I had to pick only one of them, though, I'd go with Charlotte's Web for one primary reason -- it's profitable.
Sure, CannTrust posted a profit in the first quarter. However, the company's earnings stemmed from a helpful fair-value adjustment for its biological assets. Without that adjustment, CannTrust would have lost money.
Charlotte's Web, on the other hand, has been consistently profitable for several years. Its stock trades at less than 18 times expected earnings. That's a dirt cheap bargain compared to most cannabis stocks. My view is that the expansion of the U.S. hemp CBD market, combined with growth in Europe and other parts of the world, should make Charlotte's Web a winner for a long time to come.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends CannTrust Holdings Inc. The Motley Fool has a disclosure policy.
