When it comes to marijuana penny stocks, they are some of the best buys available on the market right now. Combining strong potential for future gains with low barrier to entry cost, marijuana penny stocks have seen many portfolios balloon over the years. But there is an important lesson that investors need to know about marijuana penny stocks: they can be fragile.

Case in point: CannTrust Holdings Inc (NYSE:CTST). CTST stock has been absolutely destroyed, falling 22% on Wednesday and down to $2.00 from $10.00 in March.

The company’s troubles began several months ago, but its recent run-in with Health Canada has been the nail in the coffin. An audit found the company’s greenhouse facility in Pelham, Ontario to be non-compliant with certain regulations. (Source: “CannTrust Statement Regarding Health Canada Audit,” Cision, July 8, 2019.)

“The non-compliant rating is based on observations by the regulator regarding the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees,” wrote CannTrust.

“Growing in unlicensed rooms took place from October 2018 to March 2019 during which time CannTrust had pending applications for these rooms with Health Canada. These rooms were constructed in accordance with regulations and Good Production Practices, and licenses were issued for each of the five rooms in April 2019.  There are 12 rooms in total at the facility.”

Health Canada proceeded to place a hold on CannTrust Holdings Inc’s inventory, which includes over 10,000 pounds of dried cannabis.

Over 15,000 pounds were placed on a voluntary hold by the company at the Vaughan, Ontario facility due to the cannabis having originated from these unlicensed rooms.

That was a couple weeks ago now, but things have only gotten worse for CannTrust Holdings stock. The Globe and Mail is reporting that that Chairman Eric Paul and Chief Executive Officer Peter Aceto had been informed the company was growing pot in unlicensed rooms about seven months before Health Canada first approached the company. (Source: “Call for CannTrust management shakeup as stock plunges on report executives knew about unlicensed growing,” Financial Post, July 24, 2019.)

Now analysts from Wall Street are calling for a shakeup at the company, likely hoping that some change at the top will help stem the bleeding.

In my mind, though, considering that Health Canada could still suspend CannTrust Holdings’s license long-term, I intend to stay clear of CTST stock unless I suddenly plan on shorting it. I simply don’t see how it recovers in any speedy fashion, especially considering we’re in a downturn for the market as a whole.

The important lesson for marijuana investors, then, is that marijuana penny stocks are likely to see bigger growth, true, but these types of flubs are much more common among smaller companies where oversight is laxer. The result, as we’ve seen, can be disastrous.

There are a number of markers, though, that can warn you about a bad marijuana penny stock. Poor management, dicey decisions, infighting: all these are signs of a poorly run company and, as any investor worth their salt will tell you, poor management almost never translates to stock market success.

CTST stock is a sunk ship still sinking and I’d advise anyone holding to get out now. For those looking to profit from the company’s misfortune, you may wish to do your research and consider shorting the stock. Personally, I don’t see how CannTrust Holdings Inc can dig itself out anytime soon.

Analyst Take

CTST stock is collapsing right now, but for marijuana investors, it is a warning sign.

Marijuana penny stocks can be risky, so choose those that have solid fundamentals to reduce that inherent risk.