CannTrust (TSX:TRST) Busted Again: Avoid it Like the Plague

CannTrust Holdings Inc. (TSX:TRST)(NYSE:CTST) is in hot water again. You should avoid it like the plague.

After Aphria announced its financial earnings for the 2019 fiscal year this month, you might have been curious about the performance of CannTrust (TSX:TRST)(NYSE:CTST). Unfortunately, you will be bitterly disappointed by the company after it started to face problems with regulators and its stock plummeted.

What happened with CannTrust?

The dominoes began to fall when CannTrust applied for a management cease trade order on August 1, 2019. The company did so because it seemed likely that it would not be possible to file interim financial reports by the August 14th deadline. CannTrust was responding to a health inspection carried out by Health Canada between July 10 and July 16 this year.

Health Canada would come to rate the company’s facility in Vaughan, Ontario, as non-compliant. The July inspection by Health Canada revealed that its facility was using five rooms for storage that were previously used for operations. CannTrust was also constructing two new areas for storage.

The company had neither sought approval for these new constructions nor the re-purposing of operational areas for storage. That was in addition to more non-compliance issues found in its greenhouse facility in Pelham, Ontario, previously.

Health Canada thus placed a hold on 5,200 kg of cannabis harvested in Pelham and CannTrust voluntarily placed a hold on an additional 7,500 kg from Vaughan.

To add to the company’s woes, its auditor, KPMG, withdrew its endorsement of CannTrust financial statements for the 2018 fiscal year. In a statement, KPMG stated that the financial documents by the company should not be relied upon after a special committee uncovered new information.

What does all of this mean for CannTrust?

The most obvious impact from all the above mishaps has been to the company’s stock. Since Health Canada first reported non-compliance at CannTrust facilities in July, the company’s stock has dropped by more than 60%.

With the withdrawal of KPMG, there is no reliable information on the company’s latest financials even though trading is still ongoing. By applying for a management cease trade order from the Ontario Securities Commission, the order only prohibits management, directors, and other insiders from trading the company’s stock.

You are still free to trade as usual both on the TSX and NYSE. The NYSE noted that failing to file its 2018 annual report by the August 14th deadline might lead to a halting of trade after six months.

Should investors be worried?

One of the biggest problems to consider is that this isn’t the first time CannTrust have been found violating the law. The special committee investigating circumstances surrounding the non-compliance findings by Health Canada discovered a lot of new information.

There are uncovered emails that revealed management’s knowledge of the illegal grows in the company’s facilities, and that the company had nevertheless exported the product. This led to the removal of CEO Peter Aceto and Chairman Eric Paul on July 25.

Another problem you must keep in mind is the company’s financials. In March, CannTrust reported a net loss of $25.5 million for the fourth quarter of 2018 fiscal year. Many institutional investors were hoping that the company would be edging closer to profitability, but instead, the company reported a much higher loss than anticipated.

Remember, this was despite recreational marijuana being legalized in the fourth quarter of 2018. Worse still, the company was planning to spend even more on acquiring new land, about 200 acres, for outdoor growing.

In conclusion

For these reasons, CannTrust seems to be an unfavorable investment, and short-sellers are increasing their bets. The latest regulatory troubles only exacerbate the problems for the company, making it a strong sell for speculators and a no-go for you.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

More on Cannabis Stocks

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Should You Buy Canopy Growth Stock or Green Thumb Stock Today?

Let's dive into two cannabis giants, and which one may be the better pick for long-term investors.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Could Aurora Cannabis Stock Finally Recover by Year-End?

Down 99% from all-time highs, Aurora Cannabis stock is focused on improving profit margins and expanding sales of its medical…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Are Pot Stocks About to Surge Again? 

With pot stocks making big moves of late, many investors are now asking whether the cannabis sector is worth investing…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Pot Stocks Aurora Cannabis and Canopy Growth Bounce Back in Q4?

Down over 99% from all-time highs, Canadian pot stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets.

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »