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What CannTrust's New Allegations of Wrongdoing Could Mean for the Industry

The CannTrust Holdings (NYSE: CTST) scandal just keeps on getting bigger. While we're still waiting on a decision from Health Canada on what its punishment will be in relation to illegally growing marijuana, last week the public learned of even more potential problems: Multiple sources told BNN Bloomberg that seeds from the black market found their way into CannTrust's operations.

The industry has been hit hard

It may be a bit unsurprising for a company that's already faced allegations that it created fake walls to hide illegal growing operations from regulators, but it still has had a negative impact on the industry as investors are clearly showing a lack of confidence in pot stocks. Canadian producers, in particular, have been struggling. Since July, which is around the time that the CannTrust scandal first emerged, the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) has fallen by about 18%. And to make matters worse, there has also been lots of negative press surrounding Curaleaf (OTC: CURLF) making exaggerated claims on what its products can do, drawing the attention of the U.S. Food and Drug Administration. There have also been claims made by short-sellers that Hexo (NYSE: HEXO) might be in trouble as a result of aggressive advertising practices.

The worst might not be over for the industry, because until Health Canada hands down a decision on CannTrust, there's going to be a big question mark surrounding what kind of precedent Canadian regulators will set. It has taken just three months for CannTrust to lose more than two-thirds of its value, and there could still be more losses to come. Investors could be worried about which company will be the next to get into trouble.

A cannabis plant in an indoor grow facility.

IMAGE SOURCE: GETTY IMAGES.

Will this create a new wave of cannabis companies?

Trust is becoming a growing issue in the industry, and that could create a big opportunity for businesses and investors. Getting the correct product and the right mix of cannabidiol (CBD) and tetrahydrocannabinol (THC) is important for medical marijuana patients to ensure the product they are taking is safe and suitable for their needs. Recreational users also want to ensure they're getting a product that works for them. That's why the issue of CannTrust mislabeling products could pave the way for more transparency and the need for testing.

For medical marijuana patients, a DNA testing kit that can help give users more information about how their bodies will respond to cannabis will be very important in helping them make an educated decision about which kind of product they will need. It may seem like an excessive step to take, but with so many cannabis companies out there and doctors not always willing to recommend marijuana, it's going to be necessary, at least in the early stages of the industry's growth. Private company Lobo Genetics in Canada already offers a direct-to-consumer testing kit that will help build a genetic profile that can help give customers insights into the risks they may face and can make recommendations relating to an individual's cannabis use.

Meanwhile, TruTrace Technologies  is hoping to use blockchain technology to help identify and trace cannabis products to help verify details related to its contents, providing consumers with some transparency. While it is still in its pilot phases, it's already landed Aphria as a partner.

Takeaway for investors

Remember that there are many different ways to invest in the industry if you're uncomfortable with the volatility of cannabis producers. With concerns about the quality and accuracy of cannabis products on the rise, a whole new segment of the market could open up that focuses on verifying and validating cannabis products and matching them to the specific needs of customers.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends CannTrust Holdings Inc and HEXO. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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CURLF HMLSF HEXO APHA

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