For cannabis investors, the TSX has many options to choose from. But you wouldn’t know it if you only paid attention to headlines. Despite the grab bag of cannabis stocks trading on the TSX, Canopy Growth and Aurora Cannabis tend to hoard the lion’s share of attention.
But that’s no reason to stop your search there. In fact, if you’re willing to dig a little, you may find some worthy picks among small-cap pot stocks.
Two of the best are Aphria (TSX:APHA)(NYSE:APHA) and CannTrust Holdings (TSX:TRST). Both of these stocks have the strong revenue growth you’d expect from the cannabis industry, but also some other features that their larger peers can’t match.
However, these two small-cap cannabis stocks are not equal. For investors who’d prefer to buy just one, it helps to understand the differences between them. We can start by looking at their business models.
Business models
Both Aphria and CannTrust sell medical and recreational cannabis products. These offerings include cannabis flower and oils. CannTrust also offers capsules.
One difference between Aphria and CannTrust is their level of international focus. Aphria has placed a much greater emphasis on international expansion than CannTrust has, with more international acquisitions and a greater international presence. This means that CannTrust’s earnings will be affected more by legalization, because Aphria’s sales are spread out more across the globe.
Profitability metrics
When it comes to profitability, CannTrust has Aphria (and most other cannabis stocks) beat. In its most recent quarter it posted a net income of about $100,000, compared to a $5 million loss for Aphria. CannTrust’s operating income was much higher than its net income for the quarter at about $2.5 million. I think that operating income is a closer approximation of true earnings for CannTrust than net income, since the net figure for Q2 included a deferred income tax expense.
Growth metrics
Both Aphria and CannTrust are strong growth stocks, with revenue growth well into the double digits. Aphria has a slight edge over CannTrust when it comes to growth, with a 117% growth rate in the last quarter compared to CannTrust’s 99%. In terms of earnings growth, both Aphria and CannTrust were down in their most recent quarters, which means costs are outpacing revenue.
Year-to-date performance
In terms of year-to-date performance, both Aphria and CannTrust are currently in the red. Both of them staged impressive rallies in late summer, driven by the sector-wide explosion after Canopy’s $5 billion acquisition. And both of them fell later with October’s cannabis carnage.
CannTrust is down slightly less than Aphria at 5% for the former vs. 20% for the latter. I don’t think Aphria’s bigger year-to-date loss necessarily means much, since both of these stocks’ prices were disproportionately impacted by macro factors beyond their control.
Bottom line
Aphria and CannTrust are smaller than some of their peers in the cannabis industry, but they have some impressive metrics nonetheless. CannTrust is by far the most profitable pot stock (although its earnings are trending down), while Aphria sports some mighty impressive revenue growth. Between the two, I’d pick CannTrust, just because its operations are more profitable and it isn’t overleveraging its balance sheet out of “acquisition fever.”
