Last week CannTrust provided an important update on their plan towards compliance, which included the fact that the company had to destroy 77 million dollars worth of plants and inventory. The market reacted positively to this news and the stock shot up over 50% on the day the news was released. We have been monitoring the stock over the past week and feel that this news was much more substantial and could, in fact, give CannTrust a chance at survival and a potential comeback.
Although destroying 77 million dollars worth of plants and inventory may seem like a lot, the company has lost significantly more off of its market cap, and is trading at a mere 200 million dollars at current levels. What many bullish investors were looking for was a clear path back to compliance, license reinstatement and eventually revenue streams that can be rebuilt. Over the last 5 trading sessions, CannTrust has held on to the majority of its gains and looks to be stabilizing around $1.35.
We see two possible outcomes for CannTrust in the coming months if the company continues to provide transparency to its investors.
If CannTrust can reobtain their license to grow, sell and extract cannabis then the company would eventually be able to rebuild their reputation and bring their products to market once again. One concern we do have with this is the fact that CannTrust will enter the market with a tarnished reputation which could prove to be a much bigger barrier of entry. In our opinion, CannTrust will need to rethink their branding strategy and partner with another cannabis company to roll out products under a fresh brand. Although this will be challenging, if CannTrust can pull this off, it would not only be beneficial to the company but it could also instill a lot of confidence back into the cannabis sector. Right now investors are very concerned about the regulatory environment and the CannTrust scandal has really put a damper on investor sentiment.
The second, we think more likely scenario for CannTrust, is if they can move towards compliance then they will become a very valuable acquisition target for a larger cannabis company, who will be able to pick up some valuable assets at cheap prices. We believe that CannTrust will need their license reinstated by Health Canada before the company has a chance at being acquired, but things are looking much better now that the company has provided a much clearer path towards compliance.
The CannTrust story is a waiting game right now and although the stock price seems to have stabilized, it remains a risky place to park your money, as we don’t know how long it will take for the company to reobtain their license. If the company can provide further updates and stay on path, there could be hefty returns to be made in the stock.
(Disclosure: The author owns shares of CannTrust)
CTST shares were trading at $1.30 per share on Tuesday morning, down $0.06 (-4.41%). Year-to-date, CTST has declined -73.05%, versus a 21.99% 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...