What a difference a week makes in the marijuana trade – especially for investors of CannTrust Holdings (TSX:TRST), (NYSE:CTST). The Canadian cannabis producer’s stock rebounded Monday, gaining more than 19% on the day to close at US$3.055 (C$3.98) as it attempted to regain its footing after a disastrous five-day hemorrhage that saw it lose almost half its market cap.
The beleaguered marijuana manufacturer took a punishment beating last week, which began with a more-than-22% drop on Monday, after it publicly acknowledged that it had grown marijuana in five unlicensed rooms at its greenhouse facility in Pelham, Ont., between October 2018 and March 2019. The licences for that space were eventually obtained in April.
At first, the revelation of the unsanctioned growing rooms appeared as if it could simply have been a misunderstanding; possibly a miscommunication that led to the company jumping the gun by putting growing spaces into operation before the proper licenses had been secured. But by mid-week retailers in the provinces of Alberta and Ontario, Canada’s biggest pot market, had pulled CannTrust products from shelves after Health Canada, the federal legal marijuana regulator, put about 5,000 kilograms of the company’s dried cannabis on hold.
The pot producer then voluntarily put an additional 7,500 kilograms on hold. By Thursday, medical marijuana products that were believed to be linked to the unlicensed spaces were placed under quarantine by distributors in Denmark.
And The Hits Were Still Coming...
A report in Canada’s largest national newspaper Friday struck another blow. Based on an interview with a former CannTrust employee, the company allegedly used “fake walls” in its greenhouse facility to hide the unlicensed cannabis plants to stage what were called “misleading photographs” submitted to Health Canada. The stock dropped another 17% to close Friday at US$2.565 (C$3.34).
By the time the week was over, CannTrust stock had lost a whopping 48% of its value, wiping US$174 million (C$228 million) from its market capitalization.
To compound the situation, the accusation of “misleading photographs” sparked a complaint to the Ontario Securities Exchange claiming the company put investors at risk by not disclosing it was in breach of regulations. The complaint hinges on whether the accusations made by the former employee constitute fraud.
CannTrust stopped all sales and shipments of its products pending the Health Canada review, fueling speculation that this would deepen the chronic shortage of legal cannabis and drive prices up.
Losing Trust
As it appeared investors were losing their faith in CannTrust, industry observers were left wondering how much of the public’s belief in the burgeoning legal pot sector would be eroded along with it.
This week, the story takes a different turn. CannTrust appears to have regained its upward momentum. But will it be enough? Has anything really changed? Stay tuned. It’s only Tuesday.
The Other Pot Stocks
As for the effect all this is having on the industry? All the major pot stocks were buoyed Monday:
- Cronos Group (TSX:CRON), (NASDAQ:CRON), was up 4.49% on the NASDAQ on the day and 4.86% on the S&P/TSX Composite
- Hexo (TSX:HEXO), (NYSE:HEXO) gained 4.12% in New York and 3.95% in Toronto
- Aurora Cannabis (TSX:ACB), (NYSE:ACB) jumped 3.4% in the U.S. and 3.63% in Canada
- Canopy Growth (TSX:WEED), (NYSE:CGC) added 2.63 on the New York Exchange and 2.78% on the TSX
- Tilray (NASDAQ:TLRY) gained 2.03%
- Aphria (TSX:APHA), (NYSE:APHA) added just under 1% on both sides of the border