CannTrust Holdings (TSX:TRST): How Low Could the Stock Price Go?

CannTrust Holdings (TSX:TRST)(NYSE:CTST) is the latest marijuana stock to be hit by a major scandal.

Investors who are following the story are wondering if they should take a contrarian position in the shares or avoid the stock altogether.

Background

CannTrust is the target of a Health Canada investigation that came about as the apparent result of a tip from a former employee.

The company was accused of growing marijuana plants in unlicensed rooms. The initial report that came out from Health Canada on July 8 confirmed the claim, resulting in a plunge in the share price of CannTrust. The stock fell from a previous close of $6.46 to $3.34 over the next five trading sessions.

CannTrust halted all sales of its product while the investigation continued, and the latest revelation by Health Canada indicates it has identified a second facility that was not in compliance with regulations. The newest report says CannTurst converted five rooms into storage areas and constructed two new sections without Health Canada approval at its Vaughan, Ont. site.

Investors have put additional pressure on the stock after the second non-compliance announcement, with analysts wondering how the new findings might impact the company’s ability to begin sales again in a timely enough manner to allow it to recover.

Penalties

CannTrust is awaiting a decision from Health Canada as to the extent of the penalties it will face as a result of the non-compliance findings.

The agency could go easy on CannTrust and simply issue a fine for up to $1 million. In that case, the stock would likely rebound in a meaningful way, as investors would expect the company to quickly move back to normal operations.

The larger risk, however, is that Health Canada decides to take a more serious stance.

CannTrust says it has put 12,700 kilograms of dried cannabis on hold as a result of the initial non-compliance finding, which represents 53% of its total inventory. An order from Health Canada to destroy the product grown in the unlicensed rooms is possible. CannTrust says its financial results could be “materially adversely impacted” as a result.

In addition, Health Canada could suspend or even revokes CannTrust’s permits to grow and market marijuana and cannabis products.

Pundits are concerned this would be a death sentence for the company.

What should investors do?

As of June 30, CannTrust had about $250 million in cash and cash equivalents, but it is uncertain how much of the cash has been used in the past six weeks.

The broader marijuana sector remains under pressure amid profitability concerns and weaker-than-expected sales for some products in the recreational market.

At the time of writing, CannTrust trades at $2.75 per share. CannTrust’s stock had already fallen 50% from its 2019 high around $13 before the Health Canada issues became public.

Investors who buy now are betting on the hopes that Health Canada will give CannTrust a break. If that scenario pans out, the stock is probably very cheap today.

That said, there are concerns that Health Canada will choose to send the message that non-compliance is absolutely not tolerated. As a result, investors should be prepared for a more serious decision.

In that case, the stock could eventually become worthless.

Given the downside risk, I would avoid CannTrust and search for other cheap stocks today.

Just Released! 5 “Dirt Cheap” TSX Stocks for You to Buy Today (Yours Free)

Motley Fool Canada’s market-beating team of experts has just released a brand-new FREE report revealing 5 “dirt cheap” stocks that you can buy today.

Our team thinks these 5 stocks are critically undervalued right now, but more importantly, they could potentially make Canadian investors who act quickly a fortune.

Don’t miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your free 5-stock report now!

More reading

Fool contributor Andrew Walker has no position in any stock mentioned.

Source: The Fool
CannTrust Holdings (TSX:TRST): How Low Could the Stock Price Go?
The Fool

The Motley Fool
Contributor at mjcanada.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 News