CannTrust Holdings (TSX:TRST)(NYSE:CTST) has been on a rough ride this year, to say the least. The stock was already falling when we learned earlier this month it was in a scandal; the company was allegedly growing marijuana in rooms that weren’t yet licensed to do so, supposedly even building fake walls to cover it up.
And although the company said it would be looking to get to the “root cause” of the non-compliance, it was looking more and more as if its CEO Peter Aceto knew about what was going on. Last week, he ended up getting fired by the company.
The stock is down significantly, -75%, since the beginning of March, when it was trading at around $12.
Is the stock cheap enough that it’s worth the risk? At just over $3 per share, CannTrust might look like a tempting deal given. The stock recently hit a new all-time low since trading on the TSX, although it did get a boost from the news that it was making changes to its leadership.
Now, with the stock being valued at a market cap of $425 million, the cannabis stock is trading at less than eight times its sales, which is a bargain, as multiples in the triple digits have not been uncommon for the industry. It’s also at around two times its book value.
However, there’s a good possibility that regardless of these multiples, the stock price will continue to plummet. If we look at the comparable circumstances relating to a recent cannabis company that had its licence revoked by Health Canada, there’s little reason to hope that CannTrust could avoid a similar fate. And given how high profile the scandal has been, there are going to be a lot of people watching to see what happens to the company, which could make it more likely that the punishment will be severe.
If CannTrust does lose its licence, which certainly appears more likely than not given what we know today, the stock is going to have minimal value to investors. If it can’t grow marijuana and make any sales, then, outside the assets it holds, there won’t be a lot of value in the company. Even a change in management or acquisition might not be enough to save the stock.
Bottom line Although the stock’s low price might make CannTrust an attractive gamble for some investors, that’s all that it would be today — a gamble, not an investment. While the stock would certainly get a big boost in value if Health Canada gives it just a warning for its compliance issues, that is the best-case scenario at this point, and the least likely to happen.
By holding on to shares of CannTrust or buying them, investors are putting themselves at significant risk. While all stocks can drop in value, CannTrust is facing the added risk of not being able to conduct business and could end up being delisted. Things look bleak for the company today, and with all the uncertainty surrounding it, it’s nothing more than a speculative buy today, and a very risky one at that.
Fool contributor David Jagielski has no position in any of the stocks mentioned.
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