CannTrust Down Almost 65% in 2019—What’s Next?

On September 6, CannTrust Holdings (TRST) (CTST) was trading at 2.33 Canadian dollars. This marked a discount of 85% from its 52-week high of 15.50 Canadian dollars and a premium of 9.4% to its 52-week low of 2.13 Canadian dollars. The company has fallen 64.5% this year.

CannTrust has been under pressure due to a series of compliance issues. The company has underperformed its peers and the broader equity market. Peers Curaleaf (CURLF) (CURA), Aphria (APHA), and HEXO have returned 52.5%, 18.6%, and 29.5%, YTD (year-to-date), respectively. During the same period, the S&P 500 Index, the ETFMG Alternative Harvest ETF (MJ), and the Horizons Marijuana Life Sciences Index ETF (HMMJ) have increased 18.8%, 3.2%, and 5.9%, respectively.

CannTrust’s issues

CannTrust’s compliance issues started in July this year. On July 8, it received a noncompliance report from Health Canada for its greenhouse facility in Pelham, Ontario. The report accused it of growing cannabis plants in five unlicensed rooms from October 2018 to March 2019 while the application for these rooms was still pending at Health Canada. Health Canada also put a hold on the sale of 5,200 kg of dried cannabis harvested from these previously unlicensed rooms. The company also withheld the sale of 7,500 kg more of dried cannabis procured from these rooms.

On July 11, the company’s management announced that it would withhold the sales and shipment of all its cannabis products until Health Canada completed its review process. Further, the company announced the setting up of a special committee to investigate compliance issues raised by Health Canada. On July 25, in a press release, CannTrust stated that based on new findings, the board had terminated CEO Peter Aceto. It also asked Eric Paul, its chair and cofounder, to resign.

On September 6, BNN Bloomberg reported that a CannTrust employee had bought seeds from the illegal market to grow at its Pelham, Ontario, facility. The report cited internal documents and four direct sources familiar with the matter. It added that some of these plants had entered the production process and had been sold on the recreational market, causing illegally grown cannabis plants to enter the legal market.

Other cannabis companies to face regulatory issues

CannTrust isn’t the only cannabis company facing issues with regulatory authorities. On July 23, the FDA sent a warning letter to Curaleaf. The federal agency warned Curaleaf about selling misbranded drugs. In response, Curaleaf removed all of the statements that violated the FDA’s regulations. Recently, Curaleaf reported its second-quarter earnings results. After reporting the results, Curaleaf’s management provided a bullish outlook, which drove its stock price.

Aphria also faced allegations of financial irregularities on its acquisition of LATAM Holdings. In response, the company formed a special committee to review the acquisition and later refuted the allegations. The company reported a stellar fourth-quarter performance on August 1, driving its stock price. To learn more about Aphria’s fourth-quarter performance, read Aphria Stock Rises on Earnings Beat.

What’s next for CannTrust?

In a press release on September 5, CannTrust’s management announced that it would continue to work on improving its operations and procedures to comply with Health Canada. As part of these initiatives, the company announced that it would lower its workforce by approximately 20%. The company expects to save roughly $9 million per year by offloading these employees.

We expect CannTrust first to meet all of Health Canada’s regulations before it starts selling its products again. Even if Health Canada clears the company, it will take time for it to restore its brand image. We expect all these events to drag on the company’s near-term growth trajectory and create a long holding period for investors.