Beyond the Bong

CannTrust Investigation Obliterates Shares

Another week, another market-moving headline out of Canada…

But this one made my blood boil.

Last Monday, Canadian licensed producer CannTrust Holdings (NYSE: CTST) got pinched for stupidity.

Health Canada seized thousands of kilograms of supply from the company’s flagship Niagara indoor operation in Pelham, Ontario.

The problem? CannTrust was growing cannabis in five unlicensed rooms from October to March.

It was a tragic fall from grace for CannTrust. It went from being one of the most successful medical cannabis producers in Canada – with what I thought was a very bright future – to face-planting.

The most ridiculous part of the violation is that applications were pending for those grow rooms. And they got the thumbs-up in April.

CannTrust shares were gutted on the boneheaded move. This compounded the pain investors have suffered since the peak in April…

Chart - CannTrust Holdings Year-to-Date

These violations are going to have real-world financial impacts. And the company will face a supply shortage.

Adding salt to the wound, CannTrust announced it halted all sales and production at its smaller Vaughan, Ontario, facility on Friday. This is to allow Health Canada to conduct reviews.

Health Canada is doing quality checks at both facilities. Investors will have to wait for results until sometime between July 22 and 24.

In the meantime, shares of CannTrust are being obliterated. They cratered more than 30% last week. And I expect CEO Peter Aceto will likely get the boot before long.

Seeing Change… Slowly but Surely

Now how about something more positive?

Last week, Congress held its first-ever hearing on ending federal marijuana prohibition.

This was a historic moment. One we’ve been patiently waiting for.

The House Judiciary Subcommittee on Crime, Terrorism and Homeland Security debated “Marijuana Laws in America: Racial Justice and the Need for Reform.” The title of the hearing highlights the interesting position the U.S. finds itself in.

Legalization and decriminalization are expanding across the country. Yet arrests on marijuana-related charges have risen for two straight years. Of the 660,000 arrests in 2018, 600,000 were for possession.

Subcommittee Chair Congresswoman Karen Bass noted that since Nixon declared a “war on drugs,” African Americans have been 3.73 times more likely to be arrested for pot than their Caucasian counterparts.

Of course, the topic of race was the most contentious point of the meeting.

But the biggest takeaway was that both sides of the aisle agree American cannabis laws need to be changed.

With Democrats in control of the House, we can expect some form of marijuana reform to pass there.

And ranking Republican Rep. Tom McClintock stated, “It ought to be crystal clear to everyone that our laws have not accomplished their goals.” He expressed optimism that legalization would be an issue all lawmakers could agree on. And he added, “The fact is our marijuana laws have badly served all of us as a nation and this realization could be used to bring us together rather than tear us apart.”

Promising first steps.

An integral part of the reform discussion is the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act.

But the STATES Act is merely one legalization bill that’s been introduced in Congress this year. And almost every 2020 presidential candidate is in favor of legalizing cannabis in one form or another, with some introducing their own reefer reform bills.

As I continue to stress… U.S. federal legalization is a question of “when,” not “if.”

Along these lines, Illinois is expunging the criminal records of 800,000 cannabis offenders. Texas is also dropping hundreds of marijuana cases. And in New Mexico, decriminalization went into effect this month.

We’re slowly but surely moving forward.

The High Five

Below are this week’s High Five, where – each Monday – I cover the five pot stocks I believe will make major moves – up or down – in the week ahead.

1) CannTrust Holdings (NYSE: CTST) is our top pot stock to watch.

This is a no-brainer.

Either shares are going to fall further as more revelations come to light (possibly putting the company’s licenses in jeopardy). Or they’re going to bounce higher because of a management shakeup or hopefully some other positive headline.

Expect more significant moves.

2) OrganiGram Holdings (Nasdaq: OGI) reported third quarter earnings before the opening bell today.

We were looking for a massive 549% increase in revenue to $18.47 million. And we wanted to see an increase in earnings per share to $0.02.

But finally we got some good news from the Canadian producers.

OrganiGram shares are popping even though we saw a loss larger than anticipated because of a temporary drop in yields. But net revenue soared past expectations to $19 million and gross revenue was even higher.

OrganiGram is one of only four Canadian producers to sign supply agreements with all 10 provinces. And this morning’s results appear to show the company turning a corner.

3) Valens GroWorks (OTC: VGWCF) will report second quarter results today after the closing bell.

The cannabis products and services company began trading on the TSX Venture Exchange last week. It recently signed a number of extraction agreements with Canopy Growth Corp. (NYSE: CGC), OrganiGram, The Green Organic Dutchman (OTC: TGODF), Tilray (Nasdaq: TLRY) and others.

We want to see revenue and gross profits increase beyond the record CA$2.2 million and CA$850,000 it reported in the first quarter.

4) GrowGeneration Corp. (OTC: GRWG) bucked the larger industry declines last week. Shares of the hydroponics and organic gardening store retailer surged after announcing former Home Depot (NYSE: HD) CEO Bob Nardelli will serve as a strategic advisor.

Nardelli had success at Home Depot. And he believes he can help take GrowGeneration to the next level.

5) KushCo Holdings (OTC: KSHB) once again appears in our High Five after reporting record revenue of $41.5 million last week. This was a 221% year-over-year increase, and it saw improvements on net income.

It’s on our radar again, as the cannabis packaging company announced its application to list on the Nasdaq.

As always, we want to compare our High Five with the industry’s benchmark

As we can see, over the past month the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) was largely flat. But it took a bend lower last week…

Chart - The High Five July 15, 2019

That was in large part due to CannTrust.

Over the past month, shares of the Canadian producer were hanging in there, roughly in line with the Horizons ETF. All the damage was done over the past five trading sessions.

OrganiGram is also lagging, though we’ll see if earnings help this week.

But we do have a trend worth paying attention to. We see the ancillary pot stocks – Valens, GrowGeneration and KushCo – all outperforming the producers, as well as the marijuana ETF.

It’s been a couple weeks of big headlines from Canada… some of them quite rancid. The upside is the U.S. market continues to evolve and grow. And we’ve seen outperformance from extractors, gardening suppliers and packaging.

These could be sunny spots for investors to weather the recent storms.

If you have a pot stock in mind that you’d like me to discuss here, leave a comment below.

Here’s to high returns,

Matthew

P.S. For news on the latest breakthroughs preparing to rock the biotechnology sector, don’t miss my colleague Marc Lichtenfeld’s conversation with Newt Gingrich at The 2019 American Health & Wealth Summit.

Their conversation about lucrative companies making advances in healthcare will be broadcast on Thursday, July 18, at 1 p.m. ET.

Click here to register for the free broadcast.