CannTrust (CTST) came into the spotlight last year after Health Canada discovered that the company was growing cannabis before it had its proper license. As a result, their stock plunged from highs of over $10 to the recent lows of just 38 cents.
However, last week shares of CTST gained almost 100%. Now we did experience one of the strongest rallies the stock market has seen since the 1930’s last week, but CTST our performed its peers, like Aurora Cannabis (ACB) and Canopy Growth (CGC).
On Monday, March 23rd CTST provided the market with an update and this clearly sparked some optimism in the investing community. The company announced that it received a notification from Health Canada as a result of current circumstances created by COVID-19. As a precautionary measure for the health and safety of its employees and the community, Health Canada’s Cannabis Directorate is reducing onsite field inspection activities until at least March 31, 2020.
CTST has also been reducing its own onsite activities in response to the COVID-19 health crisis but despite the bad news, the stock rallied.
We are concerned however that Health Canada’s response to the COVID-19 pandemic could negatively impact the timing of the company’s compliance efforts. In February CTST had submitted documents to Health Canada stating their efforts towards compliance at their Niagara facility. This was part of their plan to obtain their license back and continue operations.
CTST also estimated that they should be able to return to compliance at their Vaughn facility in the second quarter of 2020. Following the changes made to their Vaughn facility CTST also planned to submit the required documents as a final step towards compliance. We fear that CTST’s efforts to return to compliance could be delayed by the COVID-19 outbreak resulting in more uncertainty for the firm.
At the end of the day, the final decision lies in the hands of Health Canada as to whether the company will get either of their licenses reinstated, and that is an uncertainty.
We do want to point out that CTST still has a pretty solid cash position of $159 million as of February 29, 2020. As we know during these crucial times in the market with so much uncertainty right now, cash is a very important asset to have on any company’s balance sheet.
Right now investors can only hope that the compliance process will not see any further delays, and that Health Canada will work with CTST allowing them to reinstate their licenses. During these tough times it would be a shame if the Canadian regulatory authority were to let a business like CannTrust fail. Canntrust remains a highly risky investment, so investors, please proceed with caution.
(Disclosure: The author is long on CannTrust)
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CTST shares were trading at $0.65 per share on Monday afternoon, down $0.05 (-7.14%). Year-to-date, CTST has declined -29.90%, versus a -19.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...
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