For investors in cannabis stocks who believe that we are now in the Wild West where anything goes thanks to legalization, they should think again. That’s especially true for investors in Canadian cannabis stocks.
Canadian Cannabis Cops Clock Company Compliance
Health Canada has slapped CannTrust Holdings with a notice of non-compliance, which has resulted in a double-digit percentage downdraft in CannTrust stock.
“The non-compliant rating is based on observations by the regulator regarding the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees."
Health Canada has put a hold on over 5000 kg of dried cannabis that was produced by CannTrust in an unlicensed growing room. CannTrust claims that the growing occurred in rooms whose applications were pending.
In addition, CannTrust itself placed a voluntary hold on 7,500 kg of cannabis at another facility that had been grown under the same conditions.
CannTrust will engage in several corrective actions. These include a review of its processes and procedures, re-training employees to make certain they are current with compliance requirements, and the use of third parties to do an independent review of those requirements.
This Was Bound to Happen
This is something that investors and cannabis companies should have foreseen. There has been a lot of hype surrounding cannabis stocks, especially after legalization in Canada. It gave investors the impression that growing and selling cannabis was now a free – for – all.
That's not the case, nor should it have been expected to be the case when government entities are involved.
Canada may have legalized cannabis and sent stocks soaring, but that doesn't mean the government is giving everyone a free pass. Health Canada already froze new applications for medical cannabis because the application pipeline had become overstuffed.
It has a long history of cannabis regulation adherence.
It was also foolish to assume that the government wouldn't conduct audits of marijuana companies. Canada does not want to become a country that is perceived as being a lawless drug haven.
If you've ever had a run-in with Canadian government officials, even at the Canadian border, you know that they are very strict when it comes to rules and regulations.
This should send a signal to all the other cannabis manufacturers that they must have all their ducks in a row if they want to keep producing legally.
Wake-Up Call for Cannabis Stocks
It's also a splash of cold water for cannabis stocks. Look what happened to one of the more respected names in the market as the result of a single government audit that went poorly. Boom! Down 22 percent in one day and another 5 percent the next.
As it is, the vast majority of cannabis stocks or penny stocks are already overvalued. There is a substantial amount of risk in the sector.
There is some good news in terms of long-term acceptance of cannabis stocks. This action helps burst the bubble that was created last year in cannabis stocks. It may help bring cannabis stocks back down to reasonable valuations if enough of these kinds of incidents occur or if enough CEOs of cannabis stocks get booted.
It is unclear when, and if, the nearly 13,000 kg of dried cannabis will be released for sale.
As a result, revenue projections for CannTrust are now up in the air and the stock should probably be avoided.