Cannabis Scandal Radar: Is Tilray Next?


Oct. 14 2019, Published 11:43 a.m. ET

Cannabis is a highly regulated industry. Marijuana is still illegal at the federal level, which leads to more illicit activities in the sector. Regulation approval is essential before the needle moves in a highly regulated industry like cannabis. Scandals have engulfed the sector many times, especially for CannTrust (CTST), Curaleaf (CURLF), and Hexo (HEXO). Could Tilray (TLRY) be next on the cannabis scandal radar? Let’s see.

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Another cannabis scandal?

According to a press release last week, Andrews & Springer, a boutique securities class action law firm, is investigating Tilray for potential securities violations and a breach of fiduciary duty claims. We’ll have to wait for more information about the investigation. However, even an accusation of a breach could impact the company and its stock price. Tilray stock closed with a loss of 12.8% last week. Hexo stock fell, which impacted the cannabis sector last week. The North American cannabis industry, as tracked by the Horizons Marijuana Life Sciences ETF (HMMJ), also fell 14.1% last week.

In 2018, a MarketWatch report said that Tilray faced scrutiny from SEC regulators. Tilray has a complex capital structure due to its association with venture capital firm Privateer Holdings. Meanwhile, the SEC was also concerned about some information in Tilray Chief Executive Brendan Kennedy’s letter to shareholders. The SEC asked to Tilray to “delete the statement that you are improving people’s lives.” Notably, the SEC also asked the company to “limit its content to supportable facts and balance your stated goals with the risks and obstacles you face.”

The SEC questioned Tilray’s operations since cannabis isn’t legal in the US. However, Tilray explained that it cultivates cannabis in Canada. The company has executive offices in the US.

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Other cannabis companies regulations scandals this year

Currently, Tilray isn’t the only company impacted by scandals this year. Hexo (HEXO) is also being investigated for possibly violating federal securities laws. The investigating law firm stated that Hexo might have provided false financial guidance to investors.

Hexo might face trouble this month. The company started the month with news that its chief financial officer resigned. As a result, Bank of America Merrill Lynch double-downgraded the stock. Next, Hexo withdrew its fiscal 2020 outlook. The company also reported its preliminary fourth-quarter results, which showed the company would report lower revenues. All of these factors caused Hexo stock to crash last week. The stock lost close to 37.6% last week.

Now, scandal news could hurt the stock more. Tilray has lost 70.2% year-to-date, while Hexo has lost 51.9% since its inception. At 10:04 AM ET, Hexo has fallen 8.3%, while Tilray stock has fallen 3.1%.

CannTrust (CTST) has been involved in regulation scandals. As a result, the stock took a massive hit. The company lost investors and analysts’ trust. Recently, Health Canada even suspended CannTrust’s license, which made matters worse for the company.

Curaleaf (CURLF) also received warning letters after it violated FDA regulations on some of its CBD-based products.

Tilray to launch CBD drinks amid scandal talks

Amid the scandal talks, Tilray plans to launch CBD drinks. On October 10, Tilray and Anheuser-Busch InBev’s joint venture company Fluent Beverage announced plans to launch CBD-infused drinks in the Canadian market as early as December. However, they need more time to develop beverages containing THC (tetrahydrocannabinol). Fluent Beverage’s chief executive, Jorn Socquet, said that the company hasn’t figured out how to include THC in drinks yet. THC is the compound that causes the “high.”

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A Forbes article mentioned that marijuana will likely steal market share from the alcohol industry. CBD-infused drinks seem to be gaining popularity. As a result, alcoholic and non-alcoholic companies plan to expand with cannabis players to produce cannabis-infused beverages. Canopy Growth also intends to launch CBD beverages with Constellation Brands. The company plans to expand into the nutritional beverage market through its acquisition with BioSteel Nutrition.

What do we think?

After Hexo’s troubles last week, many analysts downgraded Hexo and other cannabis stocks. PI Financial cut the target price for 15 cannabis stocks. To know more, read Cannabis Stocks in Trouble, PI Financial Cuts Target Price.

Jefferies cut the target price for Canopy Growth (CGC) (WEED) to 25 Canadian dollars from 77 Canadian dollars. However, analysts are still optimistic because of Constellation Brand’s (STZ) huge investment in the company. Canopy Growth is financially stable. Constellation Brands is also optimistic that Canopy Growth can expand sooner. To learn more, read Canopy Growth: Constellation’s Presence Can’t Be Ignored!

Jefferies cut the target price for Hexo, Aurora Cannabis (ACB), and Aphria (APHA). At the same time, Aurora Cannabis, Canopy Growth, Cronos Group (CRON), and Aphria are gearing up for Cannabis 2.0 this month.

Accusations and scandals could hurt a company’s reputation. Currently, the cannabis sector is growing. The industry already struggles since marijuana isn’t legal at the federal level. Therefore, cannabis companies need to be careful to gain and keep investors’ confidence.

We hope the sun shines on the cannabis sector soon. Aphria (APHA) is scheduled to report its earnings for the first quarter of 2020 on Tuesday. To learn more, read Aphria: What to Expect from Its Q1 2020 Earnings. Hexo is scheduled to report its fourth-quarter results on October 24. Cronos Group and Canopy Growth will report their results next month. We’ll have to wait and see if the earning season gets the sector back on track.

For more analysts’ updates, visit our Word on the Street page.

For more cannabis-related news and updates, visit 420 Investor Daily.


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