The one year anniversary of Canadian cannabis legalization is behind us, and the effects of Cannabis 2.0 are still ahead. Investors in the pot industry are currently in the eye of the storm, waiting to see which way the wind will blow next. Some of the top cannabis stocks are beginning to show signs of life, but is it enough to resurrect the industry?
At times like this, it's important to remember that not all cannabis companies will be around to celebrate the second anniversary of legalization. To get an idea of which pot stocks are headed for the grave, investors need to watch carefully for bad-faith operations in cultivation, production, and retail.
It might be surprising—spooky, even—to learn that some of the top cannabis stocks on the market are hiding skeletons in their closets. So, with Halloween right around the corner, let's bring those skeletons out and find out which companies investors might want to think twice about before trusting again.
CannTrust: The Cannabis Boogeyman
Yes, all right, everyone knows about CannTrust Holdings Inc. (TSX:TRST) (NYSE:CTST) already. It's become a folktale for the whole industry, a warning of what bad things are lurking behind seemingly reputable corporations. We won't go over all the sordid details again (you can read all about that in previous articles), but it's worth looking at one part of the story that's not getting enough attention.
On October 14, CannTrust announced it will destroy $77 million of pot. According to company spokesperson Jane Shapiro, "the destruction of this material is both an essential and integral part of CannTrust executing its remediation plan, as well as addressing Health Canada's remediation expectations."
Everything being destroyed stems from the illicit cannabis cultivation that was discovered back in July. That discovery led CannTrust, one of the biggest cannabis stocks, to resort to massive layoffs and the ousting of two top executives.
But what is CannTrust doing to address the fact that it let black market pot enter its facility and flow into the legal market in the first place?
This second scandal proves that CannTrust didn't just make one mistake. It made several. The fact that more than a thousand cannabis plants that originated from black market seeds were grown at the company's cultivation facility indicates that the company has a systemic problem following regulations.
It should give investors reason to believe that there may be more CannTrust scandals just waiting to come to light.
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Curaleaf: The Monster Stock Beneath the Bed
Also in July, Curaleaf Holdings Inc. (CSE:CURA) (OTCQX:CURLF) spent close to a billion dollars acquiring a Chicago-based rival. It claimed that this deal made it not just one of the top cannabis stocks available, but the biggest cannabis company in the world.
Within days, however, it was hit by a warning letter from the FDA. The letter addressed claims that Curaleaf was illegally selling CBD products and making “unsubstantiated claims” that the products treat cancer, Alzheimer’s disease, opioid withdrawal, pain, and pet anxiety.
Over the next two weeks, Curaleaf was also slapped with a class action securities lawsuit for making knowingly false and misleading statements to the investing public and was fined $250,000 by the State of Massachusetts for failing to disclose a change of ownership to state regulators.
As with the CannTrust story, this wasn't just one scandal. It was a multi-headed hydra, swallowing up investor trust and spitting out an industry-wide decline in stock prices. When the top cannabis stocks misbehave, they bring the entire cannabis space down with them.
That's not to say, however, that only the biggest companies have scandals they want you to forget. Small closets can hide big skeletons too.
PotNetworks: A Haunted Prospect
Once again, we return to July. In that month, Charles Vaccaro, President of PotNetwork Holdings (OTCPK:POTN), contacted an undercover FBI agent hoping to find someone to help “liquidate around $100 million in stock in multiple companies."
Vaccaro and two other men were involved in a scheme to buy shell companies and “take approximately 20% ownership through debt conversions. They would then transfer shares to an offshore brokerage, sell the shares, and transfer the money back into the United States."
The FBI arrested all three men, but PotNetwork Holdings is still trading and still trying to become a trustworthy cannabis stock.
But trusting it might not be a good idea for investors, seeing as it was recently hit by a class-action lawsuit that alleges two of its subsidiaries misrepresented the amount of CBD in their products.
As we've seen, when a company is caught ignoring one regulation, there's good reason to believe it's ignoring other regulations as well. While CannTrust, Curaleaf, and PotNeworks may get their collective acts together and abide by the law, investors should be careful before trusting them again.
Featured image: DepositPhotos © Yarygin
