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Investors Shouldn’t Gamble on CannTrust (CTST) Stock Just Yet

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Following news that CannTrust (CTST) was non-compliant with a Health Canada audit, the stock became untouchable. One could make a speculative case for the stock, but investors needed closure on a bigger regulatory hurdle before loading up on the stock. The firing of the CEO is the first step towards the cannabis company healing, but too many operational questions exist before the stock is anything but a gamble.

CEO Fired

On Thursday, CannTrust fired CEO Peter Aceto with cause and forced the resignation of Chairman Eric Paul. In recent days, the media reported that executives had exchanged emails acknowledging the attempt to fraud Health Canada with unlicensed cannabis production.

The stock plunged below $2 requiring that the company make a move to solidify any positive ruling from Health Canada. The company has now halted sales and shipment on all cannabis products since July 12. The lack of sales for over 2 weeks is very damaging to their financials.

The Special Committee of the Board of Directors has placed Robert Marcovitch in the role of the interim CEO. Mr. Marcovitch has previous CEO experience in the winter and outdoor sports equipment market, but no relative experience in the cannabis or the packaged consumer goods sector.

The company is now in limbo with no ruling from Health Canada going on 3 work weeks from the original announcement of the compliance issue with Health Canada. Ex-CEO Peter Aceto had discussed an expectation for audit results in 10 to 12 business days and the time span has now reached 15 days.

Giant On Hold

While the ultimate financial and regulatory impact is unknown, CannTrust has big plans in the cannabis and hemp sectors. The company recently signed a non-binding LOI to enter the U.S. CBD market via a joint venture in California with Elk Grove Farming Company. The 50/50 JV provides the company with access to a potential 3,000-acre hemp farming operation.

CannTrust has plans for planting 300 acres of hemp during the 2020 growing season. The Canadian cannabis company planned to invest $20 million for these U.S. operations through the end of 2020.

The Ontario-based company was slowly turning into a cannabis giant without all of the market hype or large stock valuation. The stock has a listed market cap just above $330 million now with the stock losing 75% of its value since the March highs of $10.

CannTrust had aggressive plans to expand cannabis production in Canada with the ultimate goal to reach a 2020 production exit rate of 200,000 kg to 300,000 kg per year. The company only sold 3,000 kg of dried flower in Q1 showing the substantial upside opportunity. By 2020, CannTrust could produce 75,000 kg of cannabis in Canada on a quarterly basis plus have a sizeable hemp-based CBD operation going in the U.S.

The issue now is whether CannTrust can still move forward with any of these plans.

Takeaway

The key investor takeaway is that CannTrust has made an initial strong step in removing the CEO and Chairman of the Board of Directors. The move should help with the Health Canada ruling on the questioned inventory, but the costs are starting to mount and the ability of the company to achieve future growth targets based on additional licenses is highly in doubt now.

Investors still need to wait for the removal of regulatory risk and deep financial concerns despite raising $170 million in a recent secondary offering. Currently, the stock isn’t anything but a gamble.

TipRanks suggests caution has a slight grip on Wall Street analysts surveying the volatile cannabis player. This boils down to 4 bullish analysts, 4 neutral, and 2 bearish in the last 3 months. (See CannTrust's price targets and analyst ratings on TipRanks)