It was inevitable. Late Tuesday, Health Canada announced that it was suspending CannTrusts’ (TSX:TRST) license to grow and process marijuana.
After months of uncertainty, and as new information came to light, the outcome was largely expected. Once one of the most trusted and respected companies in the industry, the company was caught breaking all kinds of rules.
From illegal production to insider trading and recent reports of supplying cannabis to the black market, CannTrust has been hit with a litany of charges. As a result, Canadian stocks in the cannabis sector have all been hit hard.
The suspension is notable as it is the most severe penalty imposed on a cannabis company to date. Under the terms of the suspension, it can cultivate and harvest existing crops, but new growth and production is off limits. As is the selling of cannabis.
As per a company release “The notice constitutes a partial suspension of the company’s license for standard cultivation and a full suspension of its licences for standard processing, medical sales, cannabis drugs and research”.
Despite the negative news, CannTrust also pointed out that Health Canada left the door open for the company’s licenses to be reinstated if it met certain conditions. The company said all the right things, but it will be little comfort to investors.
CannTrust’s share price plummets
After the news broke, its share price plummeted and closed at an all-time low of $1.70 per share, down 15% on the day. Over the past year, CannTrust has lost 85% of its value. At this point, not a single retail investor is in the black. Anyone who has bought into the company post IPO is sitting on losses.
We’ve warned investors buying stocks several times to not catch this falling knife. The risk to reward profile just wasn’t attractive. It still isn’t.
If the company can’t produce or sell cannabis, then bankruptcy is a real possibility. If you are still holding on to your shares in anticipation of a buyout, don’t expect to recoup a any significant portion of your investment.
If a White Knight was to emerge at this stage of the game, any offers are likely to be opportunistic in nature. They will look to acquire CannTrusts’ assets for pennies on the dollar.
Likewise, the company is still facing a slew of potential litigations. The company remains under investigation by the Serious Offences Team of the Enforcement Branch of the OSC. This is a joint RCMP and OPP Anti-Rackets branch joint task force. Not to mention, there are several shareholder class action lawsuits under way.
Is it game over for CannTrust? The finish line is certainly in the line of sight. As a result, you may be wise to look at an alternative, such as Aurora Cannabis.