Cannabis Watch: Cannabis stocks dragged down by CannTrust’s losses after cannabis seizure

Cannabis stocks fell across the board Tuesday, led by CannTrust Holdings Inc. in its continued response to the news that the Canadian regulator has seized its cannabis after finding it was growing in unlicensed rooms.

BMO Capital Markets became the latest house to downgrade the stock, lowering it to market perform from outperform.

“It is unclear how the company would have commenced cultivation in unlicensed rooms and we are surprised by this development and the inability of CannTrust’s internal operational controls to prevent this,” analysts Tamy Chen and Peter Sklar wrote in a note to clients.

What’s more, “it is unclear what Health Canada could decide with respect to the status of the affected inventory and finished products that were sold to the market,” the analysts wrote.

Bank of America Merrill Lynch downgraded the stock CTST, -5.74% TRST, -5.00% on Monday, while others slashed share-price targets. CannTrust shares fell another 7%, bringing their week-to-date losses to more than 28%.

Chief Executive Peter Aceto told the Canadian press that some of the illicit cannabis had been shipped to provinces across the country. Investment and research firm Harvest Moon said Monday that if any of that illicit product was exported to the company’s overseas markets, it would be an indictable crime that would come with a jail sentence.

See now: CannTrust shares tumble after Canadian regulator seizes cannabis

Don’t miss: One Canopy Growth co-CEO is out, and the other isn’t far behind in major shake-up at world’s largest cannabis company

The news comes just a week after Canopy Growth Corp. CGC, -0.35% WEED, +0.04%  , the sector leader by market value, surprised investors by ousting co-CEO Bruce Linton, a well-known figure in the world of legal cannabis, with his fellow co-CEO, Mark Zekulin, expected to step down as soon as replacement has been found.

The push seemed to come from Constellation Brands Inc. STZ, -2.28% , which has invested $4 billion in Canopy and was understood to be impatient with recent poor earnings. The news served as a reminder that the cannabis sector is still a young one and executives may be subject to higher expectations as established players move into the space.

In other company news, Jefferies issued a cautious note on Organigram Inc. OGI, -1.98% , noting the stock’s roughly 20% run-up in the past seven days and spurt higher Monday after the release of additional details on its previously disclosed beverage formulation technology.

“While we think Organigram is a strong and very well run company, we urge caution over the next 12 months, and particularly into next quarter given the recent strength, as we think consensus estimates are too high,” analyst Ryan Tomkins wrote in a note.

Cannabis Watch: Read all of MarketWatch’s coverage of cannabis stocks

Specifically, consensus estimates may be overlooking headwinds, including Quebec orders going out in the fourth quarter and not the third, Ontario being slower than expected given investment build into store openings and gross margin pressure.

For 2020, “we don’t think street estimates are factoring in competition in beverages, where certain peers have a head start as they already have beverage partners in place, while we also think consensus is not fully capturing the costs associated with a multi-category derivative approach, or indeed the likelihood they have to bring in a supply third party due to potentially limiting capacity,” said Tomkins.

Don’t miss: Zenabis fought short-selling financiers in the cannabis industry, but did it win?

Shares of Artelo Biosciences Inc. ARTL, +16.29% jumped more than 5% after Maxim Group initiated coverage of the stock with a buy rating and an $8 share-price target that is almost three times its current level. Artelo is developing three assets that modulate the endocannabinoid system as treatments for cancer-related anorexia, and other types of cancer, inflammatory and neurological diseases, said analyst Jason McCarthy. “With three unique assets, we find the $13 [million] valuation compelling,” the analyst wrote.

In regulatory news, the New York City ban on CBD-infused food and beverages has taken effect, according to news site Gothamist. The ban was mooted late last year after the Food and Drug Administration made it clear it would not allow the cannabis ingredient to be added to food or drinks.

CBD is a nonintoxicating ingredient that is widely held to have wellness benefits, although not a lot of research has been conducted.

See now: Here’s where the big money in marijuana stocks will be made

Companies were hoping it would be legalized in last year’s U.S. farm bill, which legalized the hemp plant. But CBD was moved under the regulatory purview of the FDA because it is the main ingredient in the only FDA-approved cannabis-based medicine, GW Pharmaceutical PLC’s GWPH, +2.67% Epidiolex, a treatment for severe forms of childhood epilepsy.

Under the New York ban, health inspectors will be authorized to seek out CBD products as part of food safety inspections and to confiscate them. From Oct. 1, offenders will be subject to fines ranging from $250 to $600.

A new report from Brightfield Group published Tuesday predicts that the market for CBD supplements could reach $23.7 billion by 2023, if the FDA creates a regulatory framework for the substance. The FDA appears more open to CBD’s being used in topicals and cosmetics, as long as companies don’t make exaggerated health claims for them.

CBD is expected to chalk up $5 billion in sales in 2019, up about 706% from 2018, according to the report, which highlights how the substance has grown fast as a grassroots movement and is line with wellness trends.

From advocacy site Marijuana Moment comes news that 150 legislators from 32 U.S. states and eight Canadian provinces are planning to tour a hemp processing facility next week as part of an agricultural conference.

The 2019 Legislative Agriculture Chairs Summit seeks to inform lawmakers about policy issues within the farming sector and will also feature panels focusing specifically on hemp and marijuana, the site reported.

Elsewhere, Aurora Cannabis Inc. shares ACB, -0.96% ACB, -0.51% were down 1.4%, Cronos Group Inc. CRON, +3.52% was up about 1%, Hexo Corp. HEXO, +0.79% was down 2% and Tilray Inc. TLRY, -0.81% was down 0.4%.

Vape and accessories maker Greenlane Holdings Inc. shares GNLN, -0.50% traded flat.

Aphria shares APHA, +0.44% APHA, +0.90% were down 0.6%, Green Growth Brands Inc. GGBXF, -6.58% was down 2.9% and MedMen Enterprises Inc. MMNFF, +0.41% was down 1.4%.

The ETFMG Alternative Harvest ETF MJ, +0.22% was down 0.7%, with 31 of its 38 constituent stocks moving lower. The Horizons Marijuana Life Sciences ETF HMMJ, +0.06% was down 1.1%, with 48 of its constituent stocks falling. The new Cannabis ETF THCX, +0.20% launched Tuesday by Innovation Shares was down 1.1%.

The Dow Jones Industrial Average DJIA, -0.26% was down 0.4% and the S&P 500 SPX, -0.03% was down 0.1%.

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