Canntrust Holdings’ problems may run much deeper, this fund manager says

Do the problems of CannTrust Holdings actually run deeper than the headlines?

Cannabis company CannTrust Holdings (CannTrust Holdings News, Stock Quote, Chart TSX:TRST) is now in sit-and-wait mode as Health Canada mulls over the matter of its unlicensed pot growing.

But shareholders should be prepared for more problems to emerge before the whole fiasco is over, says portfolio manager Gerard Ferguson.

CannTrust Holdings problems are like the “cockroach theory”

“I think that this is a scenario that might follow the cockroach theory that where you find one issue, there might be more issues to come,” said Ferguson, CEO and senior portfolio manager at Jemekk Capital Management, to BNN Bloomberg on Monday. “Clearly, there were a bunch of people involved in [attempting to] pull a fast one on Health Canada. How high up it went, I’m not quite sure.”

Yesterday, CannTrust announced that it had submitted its official response to Health Canada on the matter of unlicensed growing in five rooms of its greenhouse in Pelham, Ontario, with allegations having surfaced that the company purposefully hid the cannabis plants from inspectors behind makeshift walls. CannTrust has said that it has now formed a special committee made up of third-party members to investigate the matter; meanwhile, the federal regulator stated yesterday that it will now thoroughly review the information before making a decision.

CannTrust’s share price has taken a major hit over the past two weeks since the news broke, with the stock losing about half of its value. But investors worried about whether to sell —or even those wondering about buying TRST at these reduced prices— should probably sit still until Health Canada reaches its decision, says Ferguson.

“How it plays out for CannTrust, I’m not quite sure,” Ferguson said. “If it shows up that any of this product got into the illicit market, they’ll lose their license. If you lose your license, there’s not a lot of value left there.”

“If this is just some employees trying to pad the numbers on a quarterly basis and wanting to get a head start on these rooms, it’s probably something that you can deal with through a fine or a suspension or something like that. We haven’t figured out which one of those it is,” he said.

“I would wait to see the results of that report before I did any buying and/or selling of shares,” said Ferguson.

CannTrust has revealed the names of its special committee, which include Robert Marcovitch, formerly of K2 Sports, Shawna Page, former executive at TD Securities at Merrill Lynch Canada and John Kaden of cannabis investment firm Navy Capital Green Management.