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Can't Trust CannTrust? 3 Options for Investors After the Pot Grower's Big Blunder

Keith Speights, The Motley Fool

CannTrust Holdings (NYSE: CTST) states that its vision is to "be the global leader in providing innovative cannabis products." But apparently, that vision isn't limited to cannabis products that comply with Canadian regulations.

Last Monday, CannTrust announced that it had been notified by Health Canada that its Pelham greenhouse was in violation of regulations. The company grew cannabis in five rooms at the facility between October 2018 and March 2019 when those rooms weren't yet licensed. As a result, Health Canada placed a hold on 5,200 kilograms of dried cannabis.

On Friday, CannTrust announced that it had implemented a voluntary hold on the sale and shipment of all of its cannabis products. The company said that it took this step "as a precaution while Health Canada visits and reviews its Vaughan, Ontario manufacturing facility." In addition, CannTrust's board of directors established a special committee consisting of independent directors to investigate the matter.

What should investors do in the wake of CannTrust's big blunder? Here are three options to consider.

Cannabis plants in silhouette.

Image source: Getty Images.

1. Sell and even consider shorting the stock

With CannTrust stock in free fall, many investors have bailed out of the stock. Others who haven't sold their shares yet could join the crowd.

Some might even consider shorting CannTrust with the thought that the carnage isn't over yet. An alternative to shorting is to buy put options that increase in value if CannTrust's share price falls even more.

Remember, though, that the price tags for betting against a stock can be steep. For example, the prices for CannTrust put options have gone through the roof. And if the company's issues are resolved relatively quickly, the stock could rebound creating a short-squeeze scenario.  

2. Wait and see

It's not certain what will happen with CannTrust next. Even more regulatory violations could be found. Health Canada could impose significant fines or CannTrust's CEO could be booted out by the board of directors. 

There's also a possibility that another company could try to acquire CannTrust with its share price beaten down so much. A similar situation happened with Aphria in December 2018, although the hostile takeover attempt by Green Growth Brands was eventually rejected.

Because of all of this uncertainty, some investors might prefer to simply wait and see what happens with CannTrust. It's entirely possible that the stock rebounds over the next few weeks. 

3. Buy with a long-term perspective 

Some investors could view CannTrust as a bargain after the shellacking that its stock has taken. The company's market cap is under $400 million now, over 70% below its highs earlier this year.

Investors who contemplate buying CannTrust will view the company's issues as only temporary. The logic behind this thinking is that Health Canada will probably slap CannTrust with a fine but ultimately allow the company to ship the cannabis produced during the period when the growing rooms weren't licensed. In addition, the buy premise hinges on CannTrust receiving authorization to move forward with its outdoor cultivation plans.

If these assumptions are correct, CannTrust could be on track to produce north of 200,000 kilograms of cannabis in 2020. That impressive production capacity arguably makes the stock a steal at its current valuation.

Best option

So what should investors do?

For those who still own CannTrust, my view is that selling now isn't the best approach. It's possible that most of the damage has been done at this point. I definitely wouldn't recommend shorting the stock or buying put options in the hopes that shares continue plunging. While the stock could fall even more, I suspect that short-sellers could soon be burned.

On the other hand, I don't have a warm-and-fuzzy feeling about buying shares of CannTrust yet -- and certainly not a big position in the stock. Sure, CannTrust might very well be a bargain at the current price, but there are still too many dark clouds lingering over the company to feel comfortable about staking out a significant position in the stock.

I think that the most prudent alternative for investors to take is to wait and see how things unfold for CannTrust. Hold off on doing anything until the dust settles with Health Canada's review of the company's Vaughan facility and the board's special committee completes its review.

Based on what happens over the next several weeks, the picture should clear up as to whether or not CannTrust is a long-term bargain or more of a bust.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends CannTrust Holdings Inc. The Motley Fool has a disclosure policy.