CTST Stock: CannTrust Plummets Following Health Canada Audit

CTST Stock Devastated

CannTrust Holdings Inc (NYSE:CTST), once one of the rising stars of the marijuana industry in 2019, was absolutely slaughtered on the pot stock market on Monday following an audit from Health Canada that found its greenhouse facility in Pelham, Ontario to be non-compliant with certain regulations. (Source: “CannTrust Statement Regarding Health Canada Audit,” CannTrust Holdings Inc, July 8, 2019.)

CTST stock plummeted by 22.5% in a single day’s trading, virtually wiping out all the gains it had accrued over the past six months.

Chart courtesy of StockCharts.com

To be fair, CTST stock was already in the midst of a downturn, as evidenced by the chart above.

A few factors led to that decline, but Monday’s finding by Health Canada is certain to be one of the more monumental defeats that CannTrust Holdings has suffered.

The company released a statement in an attempt to clear up what happened, but this did little to stem the bleeding.

“The non-compliant rating is based on observations by the regulator regarding the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees,” CannTrust wrote.

“Growing in unlicensed rooms took place from October 2018 to March 2019 during which time CannTrust had pending applications for these rooms with Health Canada. These rooms were constructed in accordance with regulations and Good Production Practices, and licenses were issued for each of the five rooms in April 2019.  There are 12 rooms in total at the facility.” (Source: Ibid.)

Whatever the reason, the conclusion is this: Health Canada has placed a hold on CannTrust Holdings Inc’s inventory, which includes over 10,000 pounds of dried cannabis.

Over 15,000 pounds were placed on a voluntary hold by the company at the Vaughan, Ontario facility due to the cannabis having originated from these unlicensed rooms.

Health Canada is going to conduct quality checks of product samples over the next 10 to 12 business days. Product shortages are expected to follow, the company said.

“Our team has focused on building a culture of transparency, trust and excellence in every aspect of our business, including our interactions with the regulator,” said Chief Executive Officer Peter Aceto. “We have made many changes to make this right with Health Canada. We made errors in judgement, but the lessons we have learned here will serve us well moving forward.” (Source: Ibid.)

Overall, this is an awful situation for CannTrust Holdings that will likely put a stain on the company for a long while yet.

Legal Impacts on Marijuana Stocks

This is a good time to review just how ravaging these types of delays and issues can be to a marijuana stock.

In an industry known for volatility, having a problem like this crop up is usually a death sentence, or at least means a prolonged period of losses.

While not a direct parallel, Aphria Inc (NYSE:APHA) had a similar problem when it ran into legal trouble in 2018. Despite the issue being sorted relatively quickly, the stain of the accusations stayed with the company for over a year and it has only now begun to see recovery. While the issues are very different, the connection is that once trust among investors is lost, it takes a long while to regain it.

CTST stock will likely have to endure a similar rehabilitation, with losses probably on the horizon.

Which is a shame, because CannTrust had registered some solid quarterly reports. But as it stands, the company has simply lost investor confidence and I doubt it will gain that back anytime soon.

It’s also worth noting that CTST stock was already on a downswing. Having this happen at this time in the stock’s performance is only going to accelerate its fall to an exponential degree.

Now there is some hope for the company. Like APHA stock, there is a decent chance that a nadir will be struck and then the company can begin to climb its way back from rock-bottom, but that will take many months. For now, I’d advise investors to look elsewhere in the marijuana industry.

But this goes a long way in teaching many a lesson about pot stocks: stability is king. In an industry that is already wracked by so many question marks, both legal and financial, being able to keep a company out of the papers for problems like the one CannTrust is experiencing is even more important than in other industries.

At the same time, these events are nearly impossible to predict. Still, oversights like these are crippling to a stock’s future, and my CTST prediction is rightfully going down the tubes as a result.

While I have been in the past bullish on CannTrust Holdings Inc, readers should note that I did not include the company in the portfolio of my newsletter, Marijuana Millionaires. I’m not claiming prescience, but there were some question marks in other areas that kept me from going full-on when it came to CTST stock, even after strong financial performances.

Which is to say that, sometimes, weakness in one area can likely be linked to a weakness elsewhere in the company. In this case, the lack of strong partnerships and supply agreements were simply the tips of the iceberg where other oversights were being made.

Analyst Take

It’ll be a long while before CTST stock is able to fully recover from this blow. While there is a chance that the company will bounce back, I’d put that way down the line.

There will potentially be opportunities to turn a profit from CannTrust Holdings Inc’s misfortune by buying the company at a low point, but more problems could follow, so I’d be bearish on that move.