With CannTrust (TSX:TRST) Under Fire, Can Investors Trust Marijuana Stocks?

This past Wednesday, battered-down CannTrust Holdings (TSX:TRST)(NYSE:CTST) shares staged a major comeback, rallying 10% in the morning before cooling off later in the day. It’s not clear why investors are suddenly warming up to the stock, because its regulatory problems are far from over. Possibly, investors are beginning to see TRST as a bargain, as it has become the cheapest stock in the marijuana space by far.

But between the 5,000 kg hold imposed by Heath Canada and the 7,500 kg hold the company imposed on itself, CannTrust is going to have a hard time selling pot this quarter — that’s without even getting in to the possibility of fines and other penalties.

This past week’s rally not withstanding, CannTrust is a toxic property, down over 50% year to date. With other marijuana stocks having followed a similar pattern, investors need to start asking themselves whether they can trust weed stocks not to collapse into oblivion. Before exploring that question, let’s do a quick review of the CannTrust debacle and what it means for investors.

What the CannTrust scandal is all about

The CannTrust scandal got started when an informer tipped off Health Canada that the company had been growing pot in unlicensed rooms. After receiving the report, the agency put a hold on 5,000 kg of the company’s cannabis, preventing the sale of this product. In addition, the company put a voluntary hold on a further 7,500 kg of cannabis. In its most recent quarter, CannTrust harvested just 9,400 kg of weed, so with the holds in place, it’s possible that the company will lose out on most of its revenue for this quarter.

If that turns out to be the case, then investors will have to brace themselves for a nasty surprise when earnings are released next month.

How it could affect other weed stocks

It’s entirely possible that CannTrust’s scandal could affect other marijuana stocks for three reasons.

First, it could weaken investor sentiment, leading to a selloff. Second, it could trigger a Health Canada investigation into other producers, weakening sentiment even further. Third, such an investigation could potentially turn up real wrongdoing, not only hurting short-term sentiment but also threatening long-term fundamentals.

In the lead up to legalization, weed companies were under intense pressure to get their required approvals quickly, and it’s totally within the realm of possibility that many other producers skirted the rules like CannTrust did. If that turns out to have been the case, then investors will have to prepare for disappointment.

The beginning of the end for weed stocks?

It’s one thing to say that CannTrust is having some regulatory problems, but quite another to say that this is the beginning of the end for “Big Weed.” So far, CannTrust is the only major producer facing significant grief from the regulators. The question is whether that will remain the case, and what the outcome will be if it changes. Personally, I’m staying away from weed stocks for the foreseeable future.

You might be missing out on one of the biggest opportunities in Canadian investing history…

Marijuana was legalized across Canada on October 17th, and a little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

Besides making key partnerships with Facebook and Amazon, they’ve just made a game-changing deal with the Ontario government.

This is the company we think you should strongly consider having in your portfolio if you want to position yourself wisely for the coming marijuana boom.

Learn More About This TSX Stock Now

More reading

Fool contributor Andrew Button has no position in any of the stocks mentioned.

Source: The Fool
With CannTrust (TSX:TRST) Under Fire, Can Investors Trust Marijuana Stocks?
The Fool

The Motley Fool
Contributor for investorsnews.ca
The Motley Fool is dedicated to helping the world invest — better. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, mutual funds, and premium investing services.

In all we do, we take a different approach.

We believe – and have proven over decades – that the individual investor can beat the market.

We believe that anyone can do it, even if they don’t have a lot of time or money to devote to investing.

We believe in a long-term outlook, helping people build wealth over time.

We believe that the person best positioned to take care of your financial future is you.

And we work tirelessly on behalf of our hundreds of thousands of members who are enjoying the opportunities that come with having enough money to do the things that matter to them.

While we are headquartered in Alexandria, Va., The Motley Fool advocates for the individual investor around the globe with offices in the UK, Australia, Canada, Singapore, and Germany.

Related posts