If you’ve followed my work over the past year, you know that I’m a strong supporter of marijuana stocks. While the viability of individual names varies, overall, the lack of a defined upside excites me. In other words, the cannabis market could be the most transformative of our generation. Or it could crash and burn. For CannTrust Holdings (NYSE:CTST) and CannTrust stock, I’m referring to the latter.
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In short, CTST stock could be the first of the major New York Stock Exchange-traded cannabis companies to implode. Granted, I’m not breaking new ground here. Since the beginning of July of this year, shares have cratered over 68%. It’s a good thing that Stockcharts.com defaults to a logarithmic scale for their charts; otherwise, it’d be hard to fit that magnitude of a drop in nominal unit-based scale.
Initially, the troubles for CannTrust stock began when Health Canada, the namesake country’s federal health agency, discovered a shocking scandal: CannTrust was illegally growing cannabis. But it wasn’t just the infraction against clearly defined rules and protocol that hemorrhaged CTST stock. Instead, it was the violation’s deliberate nature.
CannTrust employees, with the knowledge of executive leadership, created illegal grow rooms hidden behind false walls. Clearly, management premeditated their actions. Thus, it was no surprise that the company fired former CEO Peter Aceto with cause.
If that wasn’t bad enough for CannTrust stock, we have another scandal: black market cannabis seeds allegedly got mixed into CannTrust’s inventory.
While it’s not as dramatic of a headline as the hidden grow rooms, this latest controversy could spell big trouble for CTST stock. Thus, I wouldn’t even gamble on the name.
CannTrust Stock Has Zero Credibility
Since its inception, virtually all marijuana companies sought one attribute: credibility.
During the early stages of the green market, companies attempted to convince investors, potential partners and financial institutions that their underlying business was realistically viable. Right now, these same firms are attempting to show that they can convert some of these storylines into actual results.
However, it’s been a trying time. Established leaders, such as Cronos Group (NASDAQ:CRON), Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY) and most recently Aurora Cannabis (NYSE:ACB) have attempted to do this conversion through their earnings results. So far, they’ve failed spectacularly.
But with CTST stock, you have the worst of both worlds. Obviously, if CannTrust knowingly created illegal grow rooms, investors can’t trust their financials. And if the story about black-market seeds is true, the company can’t even manage its own products. Thus, CTST has neither financial nor fundamental credibility.
And that really means only one thing: CannTrust stock is a goner.
Believe me: although the black-market seeds sound like a granular and perhaps inconsequential violation, it’s actually an earth-shattering one.
That’s because we have a vaping crisis on our hands. Recently, President Donald Trump declared his intentions to ban all flavored e-liquids used in vaporizers. Citing an epidemic in underage vaping, Trump didn’t appear open to negotiations.
Now, if you dig into this story deeper, you’ll recognize that the Food and Drug Administration is leaning toward illegally acquired THC-laden cannabis as a prime suspect for the surge in lung illnesses.
I mention this because of the power of public perception. Tacitly, the FDA appears to suggest that proper, retail vaping products are fine to use. But with CannTrust’s latest scandal, it proves that you can’t even trust established, legitimate organizations.
It’s truly an ugly situation for CannTrust stock.
Wall Street Has Lost Patience with CTST Stock
Although the vaping crisis has taken center stage, my opinion is this: the controversy will boil over eventually, leading to some reasonable concessions on both sides. For instance, many e-liquid companies need to take responsibility and stop using marketing that allures children.
Anti-smoking advocates succeeded in eliminating Joe Camel, the Camel cigarette’s once-popular brand face. Understandably, the cartoonish character attracted children, which of course is a big no-no. Anti-vaping advocates can do the same for donut-flavored e-liquids, for instance.
But when it comes to CannTrust, I think the bad taste they created is simply too much. Seemingly everything about this company is a lie. Worse yet, their actions impugn the (hopefully) reputable behaviors of their peers. Since marijuana stocks tend to rise and fall in sympathy with each other, CannTrust stock will victimize many names.
When the markets settle down, they’ll give a second chance to the established leaders in this space. But for CTST stock, I think Wall Street has lost its patience. One massive scandal is already enough. But having two in a highly controversial market? Why bother with CannTrust when literally every other cannabis-based opportunity is better?
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
