If you are invested in the cannabis sector, then you have surely heard of the bombshell dropped by CannTrust (TSX:TRST) earlier this week. If not, let me summarize.
CannTrust was found to have been engaged in illegal growing activities. The company produced thousands of kilograms of marijuana in rooms that had yet to be licensed.
The story has evolved over the days, and it appears that the company purposely misled Health Canada officials. Employees sent Health Canada false information and took them on fake tours when they conducted site visits.
Even if management wasn’t involved, which is difficult to believe, this is a complete lack of oversight. A prime example of poor governance, and an issue the industry has been dealing with since it took the limelight.
This led to a 40% drop in the share price of TRST and has left investors wondering, what next?
For starters, if you are not an existing shareholder, this is not the time to buy. Immediately following the news, CannTrust’s stock closed around $5.00 per share. One of our premium subscribers asked if now was the time to buy. We cautioned against buying, and it has since dropped even more closing at $4.04 on Thursday. Our stance on the company hasn’t changed.
Late Thursday evening, the company announced that it was halting all cannabis sales pending the results of the Health Canada investigation. The news is largely symbolic as Ontario and Alberta have already stopped selling its products.
What does this mean? Expect further share price downside. If the company isn’t selling cannabis products, then it isn’t generating revenue.
As new details have emerge, there is also a growing concern that the company may lose its growing license. If that happens, then it’s game over for the company.
At best, CannTrust will be forced to destroy thousands of kilograms of cannabis. Then, there is the expectation for a flurry of lawsuits that will be sure to suck up valuable cash. Cash which is at a premium in the industry.
For CannTrust shareholders, there are two options. Sell your position and cut your losses or wait until Health Canada wraps up its investigation next week (July 17th.) If the company keeps its license, then investors may see a short term bounce and will be able to recoup lost capital.
However, the fact remains that the company’s reputation has been significantly damaged. Lawsuits are sure to follow and CannTrust is likely to trade at a discount to its peers moving forward.
Investing in the marijuana industry remains highly speculative. For those looking for a safer alternative to outsized returns, consider these companies in the beaten down oil patch.