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Inside the Market Wednesday’s TSX breakouts: This marijuana stock was just added to the S&P/TSX composite index

On today’s TSX Breakouts report, there are 52 stocks on the positive breakouts list (stocks with positive price momentum), and seven securities are on the negative breakouts list (stocks with negative price momentum).

There are five cannabis stocks on the positive breakouts list and discussed today one of these securities - CannTrust Holdings Inc. (TRST-T). The company is currently profitable with an explosive earnings growth forecast. Looking ahead, the Street is anticipating the company will report EBITDA (earnings before interest, taxes, depreciation and amortization) of $50-million in 2019, $88-million in 2020 and $130-million in 2021. Earlier this week, the stock was added to the S&P/TSX composite index, broadening the company’s shareholder base.

A brief outline is provided below that may serve as a springboard for further fundamental research.

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The company

Founded by pharmacists, Ontario-based CannTrust is a licensed marijuana producer with operations in Ontario. The company has marijuana supply agreements with nine provinces.

In term of its operations, the company has a hydroponic facility in Vaughan, Ontario, as well as a greenhouse facility in the Niagara region, which is undergoing a Phase 2 expansion that will increase the company’s annual production capacity to 50,000 kilograms. A Phase 3 expansion with the building of an adjacent greenhouse is expected to increase annual production capacity to 100,000 kilograms with the first harvest expected in the fall of 2019.

On March 18, the company announced that it has filed a final base shelf prospectus under which the company can raise up to $700-million. Consequently, it would not surprise me if the company were to announce an equity financing within the next few months in order to fund its growth, especially with the stock price near an all-time high.

As at Sept., 30, the company had over $86-million in cash and short-term investments on its balance sheet.

On the third-quarter earnings call held in November, chief executive officer Peter Aceto highlighted the company’s international growth plans, “Our efforts to increase our international footprint were advanced through a very significant milestone, our first shipment of cannabis oil to our JV (joint venture) partner in Denmark, STENOCARE. This shipment was the first and only cannabis oil product in the Danish market. We’re also in the process of making our first shipment of capsules to Denmark. We took a 25 per cent equity stake in our partner STENOCARE, and they became the first medical cannabis company to list in the EU through a successful IPO (initial public offering); a true template for CannTrust’s international plans.” He added, “Another key initiative to expand our global reach is our strategic partnership with Cannatrek, one of the first vertically integrated licensed producers in Australia. Cannatrek is building a world-class 1.7 million square foot facility in Australia, which will position them as a low-cost producer and leader in the Asia-Pacific region. Cannatrek expects to commence commercial operations early next year, and as a result of our partnership agreement, we have taken a 19 per cent ownership position in Cannatrek…In the long-term, we expect that our partnership with Cannatrek will be our gateway to the Asian market, which is actively considering medical cannabis legalization.”

Last quarter, the company announced that it had purchased a 19 acre property beside its current Niagara facility, providing yet another vehicle for future production growth.

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In October, the company announced the appointment of Peter Aceto as the company’s new chief executive officer. Mr. Aceto is a seasoned management executive - the former president and chief executive officer of Tangerine Bank (previously ING Direct).

The company will be reporting its fourth-quarter financial results before the market opens on Thursday March 28.

Earlier this week, the stock was added to the S&P/TSX composite index. HEXO Corp. (HEXO-T) was another marijuana stock that was added to the S&P/TSX Index at the quarterly rebalance.

The stock is dual-listed, trading on the Toronto Stock Exchange under the ticker TRST, and on the New York Stock Exchange with the ticker CTST.

Dividend policy

The company is focused on growth and currently does not pay its shareholders a dividend.

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Analysts’ recommendations

This small-cap security, with a market capitalization of over $1.3-billion is actively covered by 11 analysts, of which 10 analysts have buy recommendations, and one analyst (Tamy Chen, the analyst at BMO Capital Markets) has a ‘market perform’ recommendation.

The firms providing research coverage on CannTrust are as follows in alphabetical order: Beacon Securities, Bloom Burton & Co., BMO Capital Markets, Canaccord Genuity, Cormark Securities, Eight Capital, GMP FirstEnergy, Haywood Securities, Jefferies, Paradigm Capital and Roth Capital Partners.

Revised recommendations

In Feb., Russell Stanley, the analyst at Beacon Securities, lifted his target price to $24 from $21.

In Jan., Tamy Chen, the analyst at BMO Capital Markets, downgraded the stock to a “market perform’ recommendation from a “speculative outperform” call and maintained her target price at $10. Cormark Securities analyst Jesse Pytlak revised his recommendation to a “buy” from “speculative buy” and maintained his target price at $11. Neal Gilmer, the analyst at Haywood Securities, trimmed his target price to $17.50 from $19.

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Financial forecasts

The Street is forecasting strong earnings growth for the company. The consensus revenue estimates are $53-million in 2018, $181-million in 2019, $287-million in 2020 and $434-million in 2021. EBITDA is anticipated to come in at $50-million in 2019, $88-million in 2020, and $130-million in 2021. The consensus earnings per share estimates are 7 cents in 2018, 15 cents in 2019, 18 cents in 2020 and 34 cents in 2021.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 14.7 times the 2020 consensus estimate, slightly above its one-year average multiple of 12.9 times.

The average 12-month target price is $15.95, implying the share price has over 22 per cent upside potential over the next 12 months. Individual target prices vary widely and are as follows in numerical order: $10 (the low on the Street is from Tamy Chen, the analyst at BMO Capital Markets), two at $11, $14, $14.50, $15, $15.50, $17.50, $18, $24 and $25 (the high on the Street is from Graeme Kreindler, the analyst at Eight Capital).

Insider transaction activity

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Year-to-date, there has not been any trading activity reported by insiders.

Chart watch

Cannabis stocks have delivered spectacular returns for investors year-to-date. CannTrust’s stock price has nearly doubled, rallying a staggering 98 per cent in less than three months. In fact, the top six performing stocks in the S&P/TSX composite index so far this year are all cannabis stocks. Consequently, the stock is nearing overbought territory with the RSI (relative strength index) at 67. Generally, an RSI reading at or above 70 reflects an overbought condition.

Technical analysis is limited given the stock’s brief trading history. The stock was listed on the Canadian Securities Exchange in August 2017 and graduated to the Toronto Stock Exchange in March 2018. However, the share price has a major ceiling of resistance around $15, near its record closing high of $14.87 reached on Oct. 15, 2018. On a pullback, the stock price has downside support around $10, near its 50-day moving average (at $10.38).

This small-cap stock is liquid. The three-month historical daily average trading volume is over 2.5-million shares.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

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If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Positive BreakoutsMarch 19 close
AGF-B-TAGF Management Ltd $5.55
ATA-TATS Automation Tooling Systems Inc $19.35
APR-UN-TAutomotive Properties REIT $10.77
BHC-TBausch Health Companies Inc. $35.00
BDT-TBird Construction Inc $7.59
BLN-TBlackline Safety Corp. $5.80
BTB-UN-TBTB Real Estate Investment Trust $4.84
CAE-TCAE Inc $29.66
TRST-TCannTrust Holdings Inc. $13.02
CWX-TCanWel Building Materials Group Ltd. $5.28
CWEB-TCharlotte's Web Holdings Inc. $24.42
CNL-TContinental Gold Inc $3.03
DIR-UN-TDream Industrial REIT $11.68
EOG-TEco (Atlantic) Oil & Gas Ltd. $1.74
EMH-TEmerald Health Therapeutics Inc. $4.60
ET-TEvertz Technologies Ltd $16.94
GBU-TGabriel Resources Ltd $0.43
GLXY-TGalaxy Digital Holdings Ltd. $2.42
GEI-TGibson Energy Inc $23.21
GIL-TGildan Activewear Inc $48.62
GWO-TGreat-West Lifeco Inc $32.72
HEXO-THEXO Corp. $9.20
HBM-THudBay Minerals Inc $9.45
KEL-TKelt Exploration Ltd $5.53
MFC-TManulife Financial Corp $23.58
MKP-TMCAN Mortgage Corp $15.60
MI-UN-TMinto Apartment REIT $19.71
MRC-TMorguard Corp. $196.00
BCI-TNew Look Vision Group Inc $31.23
NWH-UN-TNorthWest Healthcare Properties REIT $11.48
OTEX-TOpen Text Corp $51.04
PKI-TParkland Fuel Corp $40.80
PTS-TPoints International Ltd $17.70
POW-TPower Corp of Canada $30.31
REI-UN-TRioCan Real Estate Investment Trust $25.72
SCL-TShawCor Ltd $22.29
SIA-TSienna Senior Living Inc $18.63
SRU-UN-TSmartCentres Real Estate Investment Trust $34.26
SII-TSprott Inc $3.14
SLF-TSun Life Financial Inc $51.85
SU-TSuncor Energy Inc $45.74
SXP-TSupremex Inc $3.48
TVK-TTerraVest Capital Inc $13.34
TGOD-TThe Green Organic Dutchman Holdings Ltd. $5.48
TRI-TThomson Reuters Corp $75.46
X-TTMX Group Ltd $84.56
TA-TTransAlta Corp $8.94
TCN-TTricon Capital Group Inc $11.60
TNT-UN-TTrue North Commercial REIT $6.56
TC-TTucows Inc. $107.14
TWC-TTWC Enterprises Ltd. $14.00
VNR-TValener Inc $23.49
Negative Breakouts
CFX-TCanfor Pulp Products Inc $15.60
CRH-TCRH Medical Corp $3.75
GUY-TGuyana Goldfields Inc $1.35
IMV-TIMV Inc. $5.37
MAXR-TMaxar Technologies Ltd. $6.04
NWC-TNorth West Co Inc $28.64
WTE-TWestshore Terminals Investment Corp $18.35

Source: Bloomberg

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