CannTrust (TSX:TRST) – Another Bombshell Drops

Posted on August 2, 2018 by Mathieu Litalien
CannTrust TSX:TRST, is it game over?

Here we go again. Late yesterday, reports emerged that CannTrust (TSX:TRST) senior leaders were fully aware that the company was operating illegal growing operations.

Unfortunately, this is contrary to the initial reactions from management when the story first broke a couple of weeks ago. As a reminder, CannTrust has been accused of growing marijuana in un-licensed rooms, intentionally mis-leading Health Canada officials and devising elaborate schemes to keep their illegal grow ops out of the peering eye.

This has led to a number of outcomes including suspended sales, an independent investigation and a federal investigation. The outcomes of the investigations and subsequent penalties are not yet known. However, they can range from destroying existing product to losing their production license.

The latter would be a doomsday scenario. At first, it looked unlikely to happen. There were several cases of mis-management by cannabis companies that did not result in lost licenses.

However, as the case evolves and more information is known, the likelihood of a worst-case outcome for thepopular Canadian stock is increasing. There is a different feeling this time around, and CannTrust may be made an example of.

This brings us full circle to last night’s bombshell. Leaked company communications showed that CannTrust’s Chairman and CEO were both-in-the-know going as far back as November. In fact both Eric Paul (Chairman) and Peter Aceto (CEO) commented and provided advice on how to handle the situation.

CannTrust is in severe danger of losing its licenses.

If accurate, these add yet another level to the CannTrust saga. Once again, the odds of the company losing its license are increasing. Health Canada is in the position to suspend or rescind licenses. It is hard to see a situation where Health Canada doesn’t drop the hammer if these allegations prove to be true.

As of early morning, CannTrusts share price hit another 52-week low dropping 20% to $2.73 per share. We’ve cautioned investors several times not to catch this falling knife.

If the company’s licences are revoked, the only saving grace will be a white knight. A company that would come in with an offer to buy the company and overhaul management. It would have to be a reputable knight and investors looking for a premium will most certainly be disappointed.

Any bid from a White Knight is most likely to be predatory in nature. In other words, expect low ball offers to pick up the company on the cheap. Don’t expect bids to come in anywhere near the 7$ per share price point it was trading at before the news broke.

In the meantime, investors nervously await the next shoe to drop.

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Mathieu Litalien

About the author

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha and Stocktrades. Mathieu also focuses primarily on stock research and content production for Premium and the Stocktrades blog.