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CannTrust and a Big Problem Nobody’s Talking About

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  • On Thursday, CannTrust (CTST) announced that it will suspend the sale of all of its cannabis for the time being.
  • The company may lose its license.
  • Cannabis companies have struggled so far in the second quarter. We explain why.

CannTrust hints at a concern for cannabis stocks

On Thursday, CannTrust (CTST) hinted at a big problem that not enough people are talking about. The company announced that it will suspend the sale of all of its cannabis for the time being, but corporate governance is the underlying issue.

In a related development, Bloomberg reported that CannTrust may lose its license. The report cited Charles Taer, the CEO of a hedge fund that invests in cannabis stocks through its Ninepoint Alternative Health Fund.

The struggle is real

Cannabis companies have struggled so far in the second quarter. Poor earnings performance was the main reason why cannabis stocks lost value in Q2. Subsequently, cannabis companies’ stocks kept moving lower, eroding investors’ wealth. We’ve discussed this issue in some of our recent analysis, so we won’t dive into it here.

Cannabis companies keep hinting at an emerging bigger problem that no one’s talking about—corporate governance. Let’s take a closer look.

Cannabis companies’ corporate governance problem

CannTrust’s announcement was an extension of its effort to comply with Health Canada. In a recent inspection, the Canadian government found that the company was using five growing rooms that didn’t comply with regulations. For details, see CannTrust Fell, Sent Other Cannabis Stocks Into the Red.

Just this morning, the Financial Post reported that the issue wouldn’t have come to light without a whistleblower’s help. In a similar instance, Aphria (APHA) has also struggled with corporate governance issues in the past.

Corporate governance relates to a company’s all-encompassing practices. It tends to focus on maximizing shareholder wealth. The companies with the best corporate governance practices also have higher valuations and attract investors.

Circling back to CannTrust, consider that this announcement shows how some corporate governance practices fell through the cracks. The non-compliance report from Health Canada directly resulted from an apparent oversight in corporate governance. Investors paid the price with a 46% decline in CannTrust’s stock value since the news broke.

Best practices matter

A weak board composition can often lead to issues with weak corporate governance. Best practices dictate that board members have sufficient independence, and this is especially important for the chair position. Usually, former employees—including founders—aren’t considered as independent members of a board. In the case of CannTrust, its current board chairman is Eric Paul, who was also the company’s founder and former CEO.

If you’re curious about the best ways to invest in the cannabis sector, check out Finding an Attractive Pick Among 12 Cannabis Stocks.

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