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This Banker Still Isn’t Sure You Can Trust CannTrust (CTST)

It’s been two weeks since Canadian investment banker Canaccord issued its blistering report on fellow Canuck cannabis company CannTrust (CTST), blasting management for engaging for apparently “knowingly deceiv[ing] Health Canada to grow cannabis in rooms which had yet to be licensed” at its Pelham, Ontario “Niagara” facility, and concluding that “the credibility of CannTrust has now been put into question.”

Two weeks later, CannTrust’s management got tossed out on the street. On Thursday, the company announced the unceremonious firing of CEO Peter Aceto, followed by a boardroom revolt that demanded chairman Eric Paul immediately resign (which he did).

So… problem solved, right? All’s right with CannTrust stock now, and investors should have no hesitation about buying back in?

Investors certainly seem to think so. After learning of the management shake-up, on Friday, CannTrust stock surged 17% as investors rushed to re-open their positions. And yet, now it seems they may only have rushed in where the proverbial angels would hesitate to tread — because even with management turned out, Canaccord analyst Derek Dley isn’t prepared to endorse CannTrust stock.

Dley reiterates his “hold” rating on CTST, and cuts his price target on the shares in half, to C$2.50 per share, which works out to a mere $1.90 per share U.S. (i.e., 17% below where CannTrust ended up at the end of the trading week). To watch Dley’s track record, click here)

So why is Dley still leery of CannTrust?

On the one hand, it appears the board is doing what it can to restore trust with investors and avert the ire of its Canadian regulator. The board turned over management to Special Committee Chair Robert Marcovitch, the new interim CEO, and promised “to complete the remaining items of our investigation and bring the Company’s operations into full regulatory compliance.” On the other hand, though, Dley worries this may turn out to be too little, too late:

Given evidence of “senior management’s alleged awareness of the activities causing the company’s non-compliance … we believe it is now more likely than not that Health Canada will suspend CannTrust’s license” entirely, preventing CannTrust from doing business (or collecting revenue, or earning profit, natch) — basically hobbling the company and preventing it from competing in a fast-evolving marketplace.

Granted, there’s still the potential for a white knight — another Canadian cannabis company that is not yet on Health Canada’s bad side — to ride to CannTrust’s rescue, buy its assets, and thereby rescue CannTrust investors from a total loss. But Dley does “not anticipate the company being acquired in the near-term given the uncertainty surrounding the penalty expected to be levied by Health Canada.”

Translation: Even CannTrust’s assets now look so toxic that its rivals might feel safer investing their cash in duplicating these assets, than in buying them pre-built by the company. And if that’s the case, then there’s no buyout on the horizon to save CannTrust investors from their losses.

That hope, it seems, has just gone up in smoke.

All in all, this troubled cannabis player certainly has the Street divided, as TipRanks analytics indicate CTST as a Hold. Based on 9 analysts polled in the last 3 months, 4 rate a Buy on CannTrust stock, 3 maintain a Hold, while 2 issue a Sell. However, the 12-month average price target stands at $7.00, marking a nearly 230% upside from where the stock is currently trading. (See CTST’s price targets and analyst ratings on TipRanks)


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