The year couldn't have started any better for marijuana stocks. During the first quarter of 2019, the Horizons Marijuana Life Sciences ETF, the very first cannabis-focused exchange-traded fund, gained more than 50%, while over a dozen popular pot stocks surged at least 70%.

After that, cannabis stocks became a major buzzkill. Many of the most popular pot stocks are now at or near multiyear lows, with few performing worse than Ontario-based CannTrust Holdings (CNTTQ), which has fallen 84%, through this past weekend.

But with CannTrust's valuation deflating as much as it has, the question has to be asked: Is CannTrust now a buy? Before answering that, let's weigh both the buy and avoid theses. Although I usually start by examining the reasons to buy a stock, I'm going to mix things up here and first explain why avoiding CannTrust might be a good idea.

An up-close view of a flowering cannabis plant in an indoor commercial grow farm.

Image source: Getty Images.

The avoid thesis

Let's start with the elephant in the room: CannTrust's suspended cultivation and sales licenses. For those who may not have closely followed the CannTrust "saga," the company was found in July to have illegally grown cannabis in five unlicensed rooms at its flagship Niagara property for a period of six months. In addition to CannTrust having to destroy $58 million worth of product that derived from these rooms, regulatory agency Health Canada laid the hammer down on the company in September by announcing an official suspension of its cultivation and sales licenses. Although CannTrust is being allowed to complete the processing of already propagated plants, it can't plant new crops or sell any products at the moment.

That leads to the next point: financial uncertainty. With CannTrust unable to grow or sell marijuana, losses are assured for the foreseeable future. In response, the company recently announced about 140 job cuts, which it believes will be temporary. Don't forget, earnings actually matter now in the pot space, so look for Wall Street to be hypercritical of any and all losses in the industry.

Another serious problem is that CannTrust has lost the trust of investors and, potentially, consumers. This scandal, as well as the firing of former CEO Peter Aceto after it came to light that he knew about this illicit grow via emails (yet did nothing to stop it), could make it difficult for investors to trust any of the company's financial data or projections. Likewise, it could compromise any chance at landing long-term supply contracts.

Finally, the icing on the cake is that CannTrust is facing delisting from the New York Stock Exchange (NYSE) for failing to meet its listing standards. Putting the company's low share price aside, the bigger issue here is the company's failure to report any financial statements since May 14.

Sounds like a train wreck, right? Well, there's a completely different side to this story.

A cannabis leaf laid within the outline of the Canadian flag's red maple leaf, with rolled joints and a cannabis bud to the left of the flag.

Image source: Getty Images.

The buy thesis

When discussing the buy thesis, it's important to point out that while Health Canada did make an example of CannTrust, it only suspended the company's cultivation and sales licenses rather than revoking them. This leaves the door open for CannTrust to regain compliance, perhaps in the first half of 2020. CannTrust's management team believes it'll have checked all the boxes to regain compliance by the end of the first quarter, but the ultimate timeline remains to be seen.

It's also noteworthy that while CannTrust has been forced to sit on the sidelines, Canada's marijuana industry has been walloped by supply problems. Health Canada has been notoriously slow to approve sales and cultivation license applications, while Ontario, home to 38% of Canada's population, had a meager two dozen dispensaries open as of mid-October. In short, the black market has been thriving in Canada, and CannTrust hasn't lost significant market share as a result of these supply issues.

Speaking of supply, don't overlook that CannTrust is one of just four Canadian growers that has earned wholesale supply deals in every province. Though trust could become an issue, it's unlikely to be a significant problem given the aforementioned early stage supply issues. Provinces are going to be so focused on ridding the cannabis market of illicit weed that CannTrust would likely jump right back in as a supplier if its licenses are reinstated.

Lastly, there's monstrous production potential here, with the assumption that Health Canada reinstates the company's licenses. Between Niagara and Vaughan, CannTrust has around 100,000 kilos of annual hydroponic growing capacity. In addition, outdoor grow sites are expected to add another 100,000 kilos to 200,000 kilos per year of peak production, most of which, I believe, would be used to create derivative pot products. That makes CannTrust a potential go-to source for supply deals and gives it the opportunity to be a very low-cost grower.

Two red dice that say buy and sell being rolled across paperwork containing financial data.

Image source: Getty Images.

The verdict

Now that we've taken a look at both arguments, let's return back to the important question at hand: With CannTrust getting crushed in 2019, is now the time to buy?

My answer is yes, but it comes with a couple of major caveats.

First of all, you have to be willing to lose your investment. This is an exceptionally risky company given the potential loss of trust it's contending with, as well as the fact that we don't know if or when Health Canada will reinstate the company's licenses. Therefore, only investors with an exceptionally high tolerance for risk should be considering CannTrust.

The second caveat is that you need to be willing to allow the CannTrust investment thesis to play out. This is going to be a very bumpy ride, and there are certainly going to be times you regret owning CannTrust's stock. However, if you're going to buy into the thesis that this company is undervalued relative to its production potential and supply deals, allow that thesis to play out over three to five years.

Third and finally, I'd caution that more pain is coming in the very near term before things get better. In my opinion, delisting from the NYSE looks like a given, considering that CannTrust has failed to report its quarterly results in a timely manner (not to mention its low share price). Timing the market isn't our forte at The Motley Fool, but my expectation is this delisting will result in another wave down for CannTrust.

If none of these factors has scared you off, CannTrust could be an intriguing bad-news buy for 2020 and beyond.