What To Learn From the CannTrust Scandal

By Adam O'Dell  |  July 16, 2019

The cannabis industry suffered a corporate scandal last week. Top Canadian producer CannTrust Holdings (NYSE: CTST) was busted by Health Canada for growing marijuana plants in an unlicensed room.

It wasn’t an “honest mistake” either. The company used false walls and misleading statements to intentionally conceal the plants from auditors. That’s downright ridiculous!

And the thing that irks me the most is that the cannabis industry is just now getting its opportunity to come out of the dark… and into a legitimate multi-billion-dollar marketplace!

So why the hell is Canada’s fourth largest producer acting like some boneheaded youngster who’s trying to hide an illegal closet grow from his parents?

Seems super foolish to me. But I guess we can just chalk it up to good old-fashioned corporate greed, right?

More plants equal more revenue.

More revenue equal more profits…

Everyone’s happy!

Except the regulators, if they find out.

And the shareholders…

People Lie, Prices Don’t

Call me cynical, but I’m not surprised to see a corporate scandal in the cannabis industry. Disappointed, yes. But not surprised.

People lie. Some lie more than others. Corporations are made up of people. So corporations are indeed capable of lying.

This results in scandals of varying degrees of egregiousness — everything from CannTrust’s secret grow rooms, which is comparatively minor, to Enron’s purely falsified books, which is criminally major.

But beyond the actual “scandals,” can you really trust what a company’s executives are telling you?

For instance, when a CEO announces a stock repurchase program and tells you it’s because the stock is undervalued, how can you be sure it’s not a case of him padding his next bonus, which will be determined in part by the company’s earnings-per-share metric (and thus improved by a lower share count)?

Or have you ever heard a CEO describe a merger and not say there are “lucrative synergies to be exploited”? They will always say that, but only time will tell if it’s actually true.

This all makes the endeavor of investing a tough one. Who do you believe? The CEO? The Bloomberg editor? The forums? Your gut?

For me, the only solution I’ve found to this conundrum is price action. Meaning, what is the actual market price of the stock doing… is it moving up or down?

It seems overly simplistic. But I’m a firm believer that a stock’s open-market price movements are better true-tellers than anything you’ll hear or read from the C-suite.

If a stock is trending higher, it means there are more buyers than sellers, and that the buyers are willing to pay increasingly higher prices to get in. That’s real, objective information. It simply can’t be falsified! And in a world in which “truth” can be muddy, I think it’s the best thing we have to go on.

Consider this CannTrust scandal…

Shares of CannTrust (CTST) fell from $5 to $2.50 last week. That’s a sharp 50% decline, but get this…

The stock had already fallen 50% over the prior three months. That’s before news of the scandal broke!

Now, I can’t know precisely why that original price decline happened… but I do know that it told me to steer clear of the stock. All of my systematic investment strategies include what I call a “trend rule.” In simple terms, a stock must already be trending higher before I’ll consider recommending it.

If it’s trending lower, like CannTrust’s stock price was from early-April onward, it lands on my “Avoid” list. We don’t touch the stock, no matter how good the company’s story is.

This alone helped me avoid the recent carnage in CannTrust’s stock price. And while it’s not a perfect indicator, I’ve found that a stock’s primary trend is the first place to start if you’re seeking the “truth” about a new opportunity.

That’s true across the board, for any stock or asset. But I think it’ll prove to be particularly helpful in the budding cannabis industry.

The space is full of hype and big hopes, so it’s especially tough to tell what’s real and what isn’t.

My advice: Before you buy a single cannabis stock, check its trend.

If it’s already trending higher, it’s fair game. But if it’s not, steer clear.

P.S. On July 23 I’m sharing a special presentation on investing in the cannabis industry. Click here to put your name on the list — it’s free, but you must register to attend.

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Adam O'Dell

As Chief Investment Strategist for Dent Research, Adam O’Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with minimum risk. He achieves this with his perfect blend of technical and fundamental analysis.

Tactically, he does extensive back-testing and probability-based research. It’s the ultimate partner to the exhaustive research that Dent Research co-founders Harry Dent and Rodney Johnson do in the exciting realm of the new science of investing.

Adam is also the executive editor of our hugely successful trading services, Rich Investors Club, Cycle 9 Alert and 10X Profits.

He has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high-profit potential.

Aiming to find the best opportunities across all asset classes, Adam expanded into the commodities, equities and futures markets. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. MORE FROM AUTHOR