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Weekly Cannabis Stock News: CannTrust Stock Slammed on License Suspension

By Eric Volkman – Sep 21, 2019 at 8:09PM

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In retrospect, the under-siege cannabis company probably shouldn't have incorporated the word "Trust" in its name.

It's not every week -- or every month, or even every year -- that a noted cannabis company loses its license. In what was unarguably the biggest development in marijuana stocks this week, a top name in the sector had its right to grow and sell new product suspended. 

Besides that, a pair of peers was the target of fresh new analyst recommendations, one bullish and the other less so. Read on for the details.

A cannabis bud

Image source: Getty Images

CannTrust: bye-bye, cannabis license

In a development that many investors and pundits fully expected, Health Canada suspended the license of CannTrust Holdings (CNTTQ -13.33%). Earlier this year, the company found itself in the regulators' cross hairs because several grow rooms in one of its facilities had been operated without a license for several months.

Subsequent to that, it came to light that certain top managers were quite aware of this. To top it off, Bloomberg reported, citing four "sources directly familiar with the matter," that CannTrust had also used black market seeds to develop some of its plants.

With those mounting and, frankly, quite blatant and stupid transgressions, Health Canada probably had little choice but to pull CannTrust's license. 

In the press release admitting this very embarrassing development, CannTrust wrote that it "remains committed to being in full regulatory compliance." But we've heard that tune before, and given recent developments it's hard to believe much of what the company says these days.

CannTrust can win the license back if it shows either that the suspension is not warranted -- good luck with that! -- or if the factors behind it have been mitigated. While it fights for reinstatement, though, it's fully barred from growing or selling new product. It can do so for cannabis it's already growing, but that's surely not much of a base for survival. Again, best of luck.

For some reason, the stock price recovered a touch after the market had some time to digest the bad news. But CannTrust is looking like a real dog, and understandably investors are bailing. All in all, the stock fell by almost 19% over the week.

A tale of two recommendations

Two big marijuana stocks received new analyst recommendations from prominent investment banks across the past five working days. One of the analyses was quite bearish, and the other represented a significantly more optimistic view.

The former was from Oppenheimer, which initiated coverage on Canopy Growth (CGC 4.38%) with a "perform" recommendation. Although "perform" implies that the stock is fairly priced, analyst Rupesh Parikh believes the company is facing at least a few years of struggle. In fact, he's estimating that Canopy Growth will book over $500 million in net losses in the two-year period ending at the close of March 2021.

Canopy Growth is well funded, given the still large cash pile remaining from Constellation Brands' series of investments into the company starting in late 2017. But these early days of the marijuana industry are challenging for a number of reasons (supply issues in Canada, uncertainty about potential legalization in the U.S., etc.) and on top of that companies need to spend precious capital to build up scale. 

Although it's sobering to see such a big price tag slapped on one of their top names, it seems marijuana investors, or at least Canopy Growth bulls, are a robust lot. The stock fell a relatively modest 7% in price during the week.

MKM Partners enjoys somewhat less visibility than Oppenheimer. Still, a bullish note from the financial services provider on HEXO (HEXO 5.57%) put a little zip into the latter's share price, up 3% on the week.

Analyst Bill Kirk initiated coverage on a raft of marijuana stocks this week. The one he was most enthusiastic about was HEXO, one of only two issuers he recommended with a buy.

Why the optimism? Kirk feels that HEXO's strategy of partnering up with companies outside the cannabis industry is a fine way to establish brand value. Granted, the company only has one non-weed industry tie-up at the moment, but it's a goodie -- last year, brewing giant Molson Coors Brewing and it agreed to form a joint (ha ha) venture to develop cannabis-infused beverages.

That's only the first joint (venture), apparently. HEXO said this summer it's currently talking to over 60 companies in the Fortune 500 about business combinations.

Kirk feels this strategy "has the best chance of creating a defensible brand" in the industry, and he might have something there. Although HEXO is still quite far from being the pot partner of choice among traditional companies, its strategy is an offbeat and clever approach to brand-building. We'll see how the execution goes.

 

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends CannTrust Holdings Inc, Constellation Brands, and HEXO. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$2.86 (4.38%) $0.12
HEXO Stock Quote
HEXO
HEXO
$0.18 (5.57%) $0.01
CannTrust Holdings Inc. Stock Quote
CannTrust Holdings Inc.
CNTTQ
$0.00 (-13.33%) $0.00

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