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Why CannTrust (TSX:TRST) Is a Better Weed Stock Than HEXO (TSX:HEXO)

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Things are changing again in the cannabis industry after HEXO (TSX:HEXO) reported the third-quarter fiscal 2019 earnings report ending April 30, 2019, on June 12. Investors reacted negatively to the financial results, as they expected something better. As a result, HEXO’s wings were clipped, and the stock fell sharply by 8.44% to $7.81.

The drop of the high-flying weed stock created a domino effect and brought down other cannabis stocks. Shares of CannTrust Holdings (TSX:TRST)(NYSE:CTST) fell but only by almost 1%. The second-tier weed stocks are competing for investor attention. But HEXO appears to be losing steam, while CannTrust is building momentum.

A new development for CannTrust

Investor interest has shifted swiftly to CannTrust after the cannabis producer disclosed mid-week the plan to enter the hemp-derived CBD market in the U.S. Price movements of weed stocks are mostly news driven. This latest news release from an industry player lifted the sector.

CannTrust is forming a joint venture (JV) with farming management company Elk Grove Farming with each partner owning 50%. Next year is the target date of the JV to commence. The first order of the day is to obtain a long-term lease of farmland (approximately 3,000 acres) in southern California that will focus solely on hemp production.

This bold move by CannTrust signals the first step to full operations in America. The formation of the joint venture is timely, as the demand for hemp-derived cannabidiol (CBD) outside Canada’s borders is increasing. A wellness craze is sweeping North America, and CannTrust wants to seize the opportunity.

Better business outlook

HEXO disappointed investors, but the company is actually well within guidance. All the same, the stock suffered a beating but could still recover in the near term.

Meanwhile, things are looking up for CannTrust Holdings, and the JV is welcome news. According to CEO Peter Aceto, the forthcoming U.S. operation can deliver a significant increase in low-cost production capacity. The company also found the best partner for this endeavour.

CannTrust can leverage expertise in standardized CBD-based product formulation. It’s the way to gain solid footing in a large international CBD market. Elk Grove will be in charge of running the farm, taking care of packaging as well as transportation, and providing the warehouse to dry hemp products.

The new JV is not the only tailwind. Legal edible cannabis products will hit retail stores later this year. CannTrust intends to use the majority of the company’s outdoor-grown cannabis for extraction purposes. The production of edibles and concentrates will follow as these are high-margin derivative products.

Investor sentiment towards the cannabis sector is constantly varying. It can be strong in one week and weak in the next. But CannTrust has overtaken HEXO in terms of investor confidence.

While both stocks are trading at relatively cheap prices, CannTrust’s business outlook is brighter. I would have to stick to my favourite marijuana stock and concur with the analysts. CannTrust is the better investment than HEXO. The stock could be the next market mover.

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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 Christopher Liew has no position in any of the stocks mentioned.

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