Better Buy: Organigram Holdings vs. CannTrust Holdings
Do you prefer buying a stock that's hot and could get even hotter? Or is going with a stock that might have the potential for a strong rebound more up your alley? These options could very well apply to Organigram Holdings (NASDAQ: OGI) (TSXV: OGI) and CannTrust Holdings (NYSE: CTST), respectively.
Back in early March, both Canadian marijuana producers claimed similar market caps of around $1 billion and were up more than 90% year to date. Now, though, Organigram stock has still more than doubled so far this year while CannTrust gave up nearly all of its gains.
Which of these marijuana stocks is the better choice for forward-looking investors? Let's look at what both Organigram and CannTrust have to offer.
The case for Organigram
Organigram lagged behind many of its peers in listing on a U.S. stock exchange. That's not a problem now, though, with Organigram shares beginning to trade on the Nasdaq (NASDAQ: NDAQ) in May. This move gives Organigram more visibility to the large base of U.S. investors. Of course, that's not a reason to buy Organigram. But there are several reasons to consider doing so.
One key advantage for Organigram is its low cultivation costs. The company appears to lead the industry on this front. That's important because it means that Organigram can deliver higher margins. At the end of the day, investors want profits that can be reinvested to fuel more growth.
The main thing that many look at in differentiating Canadian cannabis producers right now is production capacity. Companies with higher production capacity are enjoying stronger growth. Organigram currently can grow around 47,000 kilograms on an annualized basis. But by the end of 2019, the company expects its annual capacity to increase to 113,000 kilograms.
Some cannabis producers don't have extensive supply deals with provinces, so they sell their products wholesale to larger producers who do have such deals in place. Organigram isn't one of them. The company has signed supply agreements for adult-use recreational marijuana with all 10 Canadian provinces, an achievement that only three other companies can claim.
Organigram also appears to be in good shape for the cannabis edibles and derivatives market that's expected to open later this year. It's beefing up its production and extraction operations in anticipation of this opportunity. These efforts include Organigram's purchase of a high-speed automated production line that can produce close to 4 million kilograms of chocolate cannabis edibles annually.
International medical cannabis markets present an even greater long-term opportunity than the Canadian medical and recreational cannabis markets combined. Organigram teamed up with Alpha-cannabis to target the big German medical cannabis market. The company also signed an offtake agreement with Serbian hemp producer Eviana that positions it to supply hemp-based cannabidiol (CBD) products throughout Europe.
The case for CannTrust
CannTrust beat Organigram to the punch in listing on a U.S. exchange. The company's shares began trading on the New York Stock Exchange in February.
There's no question that CannTrust is a leader in the Canadian medical cannabis market. It claims the highest market share in oil products in that market and delivered year-over-year patient growth of 70% in the first quarter of 2019. CannTrust also won seven awards at the Canadian Cannabis Awards in 2018, including Licensed Producer of the Year.
But how is CannTrust faring in the larger adult-use recreational market? Not bad, although the company's sales are growing as briskly as some of its rivals. CannTrust has supply agreements with nine of Canada's 10 provinces. It should also be able to generate even more growth as its partner, National Access Cannabis, opens additional retail locations throughout the country.
CannTrust has a really interesting story when it comes to production capacity. The company expects to be able to produce roughly 50,000 kilograms of cannabis on an annualized basis by next quarter. That capacity should double by the third quarter of 2020 as CannTrust completes its phase 3 expansion of its Niagara facility.
What's especially intriguing with CannTrust, though, is that the company has big plans to grow cannabis outdoors. CannTrust CEO Peter Aceto stated in the company's Q1 press release that he expects the company will "exit 2020 at a production rate of between 200,000 kg to 300,000 kg per year" thanks in large part to its outdoor efforts. The company intends to focus the cannabis grown outdoors in producing derivative products.
CannTrust has a couple of international partners. It owns 19.8% of Australian cannabis company CannaTrek. CannTrust also owns 19% of Danish cannabis company Stenocare. These two partners give CannTrust springboards for legal medical cannabis markets in Asia and Europe.
The choices between Organigram and CannTrust isn't an easy one. I like both of these stocks. If I had to pick only one of them, though, I'd go with CannTrust.
My decision comes down primarily to valuation. CannTrust's market cap is less than two-thirds the size of Organigram's, but the two companies are on track to have relatively similar indoor production capacities. I also think that CannTrust's strategy of growing cannabis outdoors for derivatives extraction could pay off nicely.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends CannTrust Holdings Inc, Nasdaq, and OrganiGram Holdings. The Motley Fool has a disclosure policy.