What can we say about CannTrust Holdings Inc. (NYSE: CTST) that hasn’t been said about any of the other pot stocks? A receding tide for the marijuana industry has lowered all ships, and each stock has felt the sting since the market boom in the fall of 2018.
What separates CannTrust from the group is not necessarily positive, but it may be more predictable than anything. This company has been fighting problems on multiple fronts, and if this stock can weather the storm, very blue skies may lie ahead for investors.
Is the Market Going to Pot?
Marijuana stocks in general had an auspicious start in 2018, when most came public on U.S. exchanges. For the most part, cannabis companies saw their shares double or triple, at the very least, after coming public. The excitement surrounding these stocks at the time seemed to come more from lack of competition and limited vehicles of investment for this industry, especially considering marijuana is still illegal in the United States on a federal level.
While the marijuana industry saw massive gains after its onset in the market, the losses came just as quickly. None of these stocks have even approached their highs of 2018. In fact, it’s only gotten worse, with increased competition and the cannabis investing craze seemingly over.
After about the first two months of 2020, cannabis stocks have still been slipping. Aurora Cannabis Inc. (NYSE: ACB) traded down nearly 23%, Aphria Inc. (NYSE: APHA) about 21%, Hexo Corp. (NYSE: HEXO) about 11%, Cronos Group Inc. (NASDAQ: CRON) nearly 7% and CannTrust was down nearly 11%. Canopy Growth Corp. (NYSE: CGC) and Tilray Inc. (NYSE: TLRY) are really the only positive stocks out of this group, up 4% and 13%, respectively.
It’s safe to say that this is not shaping up as a good year for pot stocks. On the other hand, it begs the question whether this is a good buying opportunity?
Is the Roller-Coaster Ride Over?
CannTrust faced some issues last summer, when the company had to stop selling its cannabis products after the Canadian government suspended its license for illegally growing thousands of pounds of marijuana in unlicensed facilities. By the end of July, there were a couple big changes to its management team: the CEO was fired and its president was forced to resign.
Only recently, an Ontario court announced a class-action lawsuit against CannTrust in regards to its illicit cultivation scandal from the summer. Perhaps some of the worst news out of the lawsuit is the law firm on the case. Henein Hutchinson is taking the lead on this, and it is one of Canada’s top litigation firms. Its partner, Marie Henein, has a reputation for being a no-holds-barred litigator.
Yet, the bumpy ride is not over. The company has not filed the required U.S. Securities and Exchange Commission (SEC) quarterly reports since the end of the first quarter of last year.
As a result, another major challenge facing CannTrust is its compliance with the New York Stock Exchange listing standards. Its shares are currently trading at less than a dollar, which could prove problematic in its ability to remain a listed company on the index. CannTrust faces a similar dilemma with the Ontario Securities Commission and its continued listing on the Toronto Stock Exchange, which it has until late March to remedy.
Is There Any Way Out?
Where will CannTrust stock go from here? With the mounting legal problems and the stock no longer in listing compliance, the direction of the share price is on everyone’s mind.
If CannTrust’s new management team can deliver its financial statements by the end of the first calendar quarter of 2020, the company could recover, given that it hasn’t lost its customers for good.
At the end of December 2018, CannTrust reported inventory assets of $35.4 million, growth of more than three times year over year. At the end of the first quarter of 2019 (the last quarterly report CannTrust filed), the company’s inventory value had grown to more than $55.8 million. It is worth noting that before getting its license suspended, the company said it expected production capacity to rise to a range of 400,000 to 660,000 pounds by late this year.
As harshly as CannTrust was treated this past summer, last year’s flagging cannabis market was a good time to get sideways with the regulators. The company was looking at producing about 220,000 to 440,000 pounds of marijuana last year. Not having to soak off all that inventory this year (if it gets its licenses back) could be a plus for the company.
What to expect from CannTrust in 2020 is a glass either half-empty or half-full. The effects of its licensing violations will continue to be felt this year, and there’s been no indication the Health Canada is working overtime to get the company back on track. There’s no reason it should. After all, the former CEO knew about the illegal grows and, at best, did nothing to stop them.