Is CannTrust Holdings Inc (TSX:TRST) a Buy After Dropping 20% Last Week?

CannTrust Holdings Inc (TSX:TRST)(NYSE:CTST) stock struggled after releasing its earnings, but I expect the stock to mount a bit of a recovery this week.

CannTrust Holdings (TSX:TRST)(NYSE:CTST) released its earnings last week and investors were not impressed, as the stock went over a cliff shortly afterwards. Despite its sales rising more than 132% during the quarter, the company’s bottom left a lot more to be desired, as CannTrust still ended up recording a very heavy loss totalling more than $25.5 million.

Ultimately, this is really par for the course in an industry where rising sales have often been met with mounting losses. And so for the stock to drop so drastically on these results might be a bit surprising. The company still has significant growth prospects, as it is working towards adding capacity and even looking at growing outdoors to help increase its output even further.

In an industry where supply is limited, capacity is the name of the game, and CannTrust is positioning itself to capture a lot of the market with more space for production. As impressive as its sales growth has been this past quarter, it’s only scratching the surface of what its potential could be in just a few years’ time when it will be able to produce even more cannabis.

CannTrust a cheap buy compared to key rivals

The recent drop in price could be a welcome opportunity for investors to buy up the stock at a more modest price. I wouldn’t be surprised to see a bit of a recovery this week, as investors take a second look at the stock and consider the potential upside it has. Trading at a price-to-sales ratio of less than 25, CannTrust might actually seem like a bit of a bargain compared to its peers in the industry.

To put its value into perspective, consider that Canopy Growth trades at around 130 times its sales. Rival Aurora Cannabis, meanwhile, also trades at a multiple of over 100. Since profits are hard to come by in the industry and are often inflated by non-operating results, using a multiple of sales seems to be the best way to compare valuations today.

However, the argument could be made that both Canopy Growth and Aurora are much more established and more notable brands in the industry with even greater growth prospects, hence the bigger multiples. The problem is that at multiples of more than 100 times sales, that’s a significant premium for any investor to pay, regardless of how bullish they may be on a company or industry. I’d argue that CannTrust is still a very expensive stock at its multiple, but relative to its peers, that doesn’t appear to be the case, and that’s why I’d expect to see some sort of a rally this week.

Bottom line

CannTrust is not one of the big players in the cannabis industry today, but that could change with what it has planned for the future. For that reason, I’d keep a close eye on the stock, as the potential is certainly there for it to grow into a much bigger brand. There’s definitely some risk in investing in CannTrust as it has been very volatile over the past year, but that being said, it’s still been able to generate returns of over 30% during that time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

More on Cannabis Stocks

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Could the Cannabis Bubble Re-Inflate?

Let's dive into the question of whether the Canadian cannabis bubble can re-inflate from here.

Read more »

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Should You Buy Canopy Growth Stock or Green Thumb Stock Today?

Let's dive into two cannabis giants, and which one may be the better pick for long-term investors.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Could Aurora Cannabis Stock Finally Recover by Year-End?

Down 99% from all-time highs, Aurora Cannabis stock is focused on improving profit margins and expanding sales of its medical…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Are Pot Stocks About to Surge Again? 

With pot stocks making big moves of late, many investors are now asking whether the cannabis sector is worth investing…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Pot Stocks Aurora Cannabis and Canopy Growth Bounce Back in Q4?

Down over 99% from all-time highs, Canadian pot stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets.

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »