Analysts are predicting that weed stocks will surge this fall, though the drivers of the Canadian marijuana are varied and complex enough to throw a curveball. Besides which, a sudden spike in prices may precipitate a big sell-off as shareholders seek to capitalize on a once-in-a-lifetime opportunity for gains.
Early signs of that looked-for $5 billion per annum industry will be crucial to stock performance, as tensions are likely to be high. Meanwhile, market stressors are likely to impact stock prices, while per-gram prices of the green stuff itself are likely to oscillate and drive stock volatility come October.
Which of these two high-profile weed stocks is most likely to make you rich if you buy now?
CannTrust Holdings Inc. (TSX:TRST)
One of the clear front-runners of Canadian marijuana, CannTrust Holdings, is overvalued by a third of its future cash flow value, and also has a high P/E ratio of 29.5 times earnings. Like many of its fellow weed stocks, CannTrust Holdings is looking at high growth: 66.7% expected annual growth in earnings in this case. This estimate helps alleviate that undesirable P/E.
For that kind of growth, CannTrust Holdings’ PEG of 0.4 times growth looks like especially good value, though a high P/B of seven times book is off-putting and also out of line with its competitors. A healthy return on equity of 22% last year plus minimal debt of 11.7% of net worth are encouraging signs, though.
CannTrust Holdings’ share price peaked in May at around $10. Contrast that with today’s price of $6.73 and you have a stock that has depreciated vastly in a very short time.
Overvalued by 10 times its future cash flow value, Canopy Growth is currently loss making, which makes its P/E and PEG ratio unreadable. For first-time investors who have heard so much about this stock, that might seem like bad news. However, Canopy Growth’s P/B ratio of 5.9 times book actually suggests better valuation per assets than CannTrust Holdings.
A 70.3% expected annual growth in earnings also beats CannTrust Holdings, and a 0.7% debt compared to net worth is even better than CannTrust Holdings very low debt.
Share prices peaked in June at around the $48 mark. Compare with today’s price of $33.56 and you’re looking a stock with similar momentum to its competitor, though not necessarily a better valued one.
The bottom line
Both stocks’ prices continue to show upward momentum, despite each having lost around a third of their peak price during the summer. This upward swing is likely to continue until legal marijuana hits the market, at which point investors will begin to see how their chosen assets perform.
This suggests that both stocks still have some upside, meaning that while investors getting in now have missed out on the biggest margins, they still have the chance to make a profit. CannTrust Holdings is looking like a very solid stock at the moment, with good prospects in overseas medicinal marijuana, and would seem the stronger choice of the two stocks listed here.
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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.