The CannTrust debacle has made the cannabis sector toxic, this investor says

CannTrust debacle: the pot sector will continue to feel downward pressure coming from last week’s CannTrust Holdings (CannTrust Holdings News, Stock Quote, Chart TSX:TRST) revelations, says portfolio manager David Cockfield, who warns that the industry as a whole presents a toxic environment for investors.

News broke last Monday that Vaughan, Ontario-based licensed cannabis producer CannTrust had received a non-compliance report from Health Canada over unlicensed growing in a number of rooms at its facility in Pelham, Ontario. The announcement was followed up this week with news that Ontario’s securities regulator is now looking into a complaint filed against CannTrust alleging undue risk of harm to shareholders and potential fraud.

The result has been not only the decimation of CannTrust’s share price, which is now down 58 per cent over the past two months, but has caused a pullback across the sector as investors reconsider the prospects of pot companies both in Canada and the United States. The Horizons Marijuana Life Sciences ETF which tracks the sector in North America was down 8.3 per cent last week.

The added uncertainty in an already risky sector won’t be resolved too quickly, either, says Cockfield, managing director at Northland Wealth Management, who spoke to BNN Bloomberg last Friday.

“There are some strong players [but] now CannTrust has come along and really muddied the waters,” Cockfield says. “Suddenly, you’re looking at investors saying, ‘Hey, I own CannTrust and they may lose their license. They may literally disappear.’ That has put a fear element into the environment that’s not likely to dissipate anytime soon.”

“The market got way too excited about pot stocks. There’s far too many of them, and I would say that 75 to 80 per cent of the pot stock out there right now trading in the market probably will not be there a couple of years from now,” he says.

Yesterday, the Globe and Mail reported that the CannTrust debacle may even have its effect on the timeline for legalization in the US, quoting Washington-based financial services policy analyst Jaret Seiberg of Cowen who said, “The more problem there are north of the border, the more it complicates the issue of legalization in the US.”

Cockfield says the sector as a whole still needs to find its feet, as questions remain about profitability.

“We as investors have been watching the pot stocks and our general view is that we really don’t know who’s going to make any money,” Cockfield says. “It would appear that the price of the legitimate marijuana is above that which you can buy on the street corner, so how do you expect the legitimate guys to make any money?”

“I guess that if you talked to me a few months ago, I would’ve said to take some profits, and I still think that if you’ve got some substantial profits that I would definitely take them now and maybe hold half a position or a quarter position,” he says. “The environment here is toxic and isn’t likely to improve anytime soon, so if you’ve got the stomach for that, that’s alright but if you haven’t, I would exit.”