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Why CannTrust Jumped 15% (Hint: Damage Control)

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On July 25, CannTrust (CTST) stock jumped almost 15% after the market closed. The jump was driven by a damage-control initiative whereby the company announced leadership changes. In other news, Bloomberg reported that there could be interest in buying out CannTrust. The news came as a relief to investors, as CannTrust has lost nearly 60% so far in July. It all started when Health Canada discovered that CannTrust had been growing cannabis in five unlicenced rooms. In a heavily regulated cannabis business, such missteps can be damning to a company’s future.

We pointed out an underlying issue as soon as the initial news broke about the company’s regulatory noncompliance. The underlying issue was related to the company’s weak corporate governance practices. Learn more in CannTrust and a Big Problem Nobody’s Talking About.

More bad news

In the following days, more information about CannTrust’s leadership mismanagement came to light. On July 23, The Globe and Mail reported that the company’s chair and CEO may have been aware of the noncompliance issue well in advance. This news alone drove the stock down 22%. Read CannTrust Stock Fell 22% Due to New Information. Two days after that news, CannTrust announced that it had terminated CEO Peter Aceto’s position “with cause.” The company also demanded its board chair, Eric Paul, resign, and he complied.

The company plans to make further changes to its operations, which we’ll likely learn about in the coming days. In a press release, the company assured investors that it has the foundations to rebuild. However, the damage to its reputation is already done.

Mismanagement in the cannabis industry isn’t new. The industry has seen this in the past with Aphria and Namaste Technologies. Just as those wounds were healing, CTST’s issue came to light. The company stated that the financial impact related to this issue is unknown.

Cannabis stocks

Other cannabis stocks will gain from CannTrust’s loss due to the suspension placed on its products. Peers Canopy Growth (WEED) (CGC) and Aurora Cannabis (ACB) have developed significant capacities, and with the void created by CannTrust, they have a good chance to fulfill the resulting demand for cannabis products.

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