3 Possible Buyers of Troubled Pot Stock CannTrust Holdings

It’s very possible that in a decade we, as investors, will look back on the cannabis industry as the greatest growth opportunity of our generation. After producing a mere $3.4 billion in legal worldwide sales in 2014, legal marijuana revenue neared $11 billion in 2018, according to the duo of Arcview Market Research and BDS Analytics.

However, in a decade’s time, growth is really expected to take off. With Canada legalizing recreational weed this past October, and favorability toward legalization growing in the U.S., one Wall Street firm believes global annual marijuana sales could hit $200 billion.

But as investors, we also understand that not every company in a fast-growing industry will necessarily be a winner. Just ask investors (such as Yours Truly) of Ontario-based CannTrust Holdings (NYSE:CTST), which has lost close to three-quarters of its value since late March…

The CannTrust scandal, explained

Although there are a number of reasons CannTrust’s stock sank during the second quarter, including wider-than-expected losses tied to its outdoor-grow production project, as well as a $170 million shelf offering that diluted existing shareholders, the real kick in the pants was the admission earlier this month that the company had blatantly violated cannabis growing regulations.

For those of you who may not have followed the story closely, CannTrust announced that it had been growing marijuana in five unlicensed rooms between October 2018 and March 2019 at its flagship Niagara facility in Pelham, Ontario. These rooms were subsequently licensed in April 2019. As a result of this admission, Health Canada is holding 5,200 kilos of inventory from these rooms, with CannTrust placing a hold on another 7,500 kilos being held at its Vaughan campus, for a total of 12,700 kilos. Not long thereafter, CannTrust announced that it had also ceased sale operations, putting the company’s future at a total standstill until Health Canada issues its punishment.

There are a number of possible outcomes for CannTrust at this point. It could get an effective slap on the wrist with a 1 million Canadian dollar fine, or it could lose the 12,700 kilos in inventory. Another possibility is a temporary suspension of its cultivation license, or perhaps a complete revocation. Having what could be the third-largest producer subvert regulations is unprecedented, so it’s really anyone’s guess what happens at this point.

Three white knight suitors that could acquire CannTrust on the cheap

However, one idea I’d suggested shortly after the scandal was announced was the possibility of a lowball buyer emerging. On Thursday, BNNBloomberg in Canada announced that the hunt has begun for a possible white knight buyer of CannTrust — the idea here being that an acquirer’s license would not be revoked, thereby allowing CannTrust to continue its operations. Of course, buyers are likely to be hesitant of a purchase until the full scope of the penalty from Health Canada is known.

With the understanding that this is completely hypothetical and no buyout may occur, here are three pot stocks that could be the perfect suitors to gobble up CannTrust at a depressed price…

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