Will Canadian cannabis stocks remain under pressure following the release of information related to product recalls or will this weakness provide investors with the best buying opportunity of 2017?
Late last week, The Globe and Mail published an article on the discovery of Myclobutanil, a controversial pesticide found in in products sold by Mettrum Ltd. (MT.V), a federally licensed medical cannabis producer.
What is Myclobutanil?
Myclobutanil is a chemical that is prohibited for use on legal cannabis in Colorado, Washington and Oregon because of health concerns. The pesticide is known to emit hydrogen cyanide when heated.
This development follows Mettrum’s voluntary recall on November 1st after pyrethrin, a pesticide not approved for medical cannabis, was found in its products. Following this discovery, Mettrum said that its use was a mistake because it was not listed as an ingredient in a spray used by the company.
When Health Canada decided to further test Mettrum’s samples following the November voluntary recall, the agency found myclobutanil in the tested products. For reasons that are not clear, neither Health Canada nor Mettrum reported these findings to the public. The article raises questions about what controls Health Canada has in place to ensure the product is free of contaminants and chemicals.
Mettrum did not say how the myclobutanil ended up in its product but according to the Globe and Mail article, one of the company’s employees responded in the affirmative when asked if the recall also involved myclobutanil.
Fundamental Story Remains Intact Despite Headwinds
Canadian licensed cannabis producers have been under pressure during the last month and each member of the big five (Canopy Growth, OrganiGram, Aphria, Mettrum, and Aurora) have fallen at least 5%. Of these companies, Aurora Cannabis (ACB.V) was the top performer (down 5.7%) and Canopy Growth (CGC.TO) was the worst performer (down 19%).
We anticipate further weakness in this sub-sector of the cannabis industry as recent developments may have a short-term negative impact on market sentiment. Despite these headwinds, we remain bullish on the Canadian cannabis industry and would be buyers of select companies on further weakness.
Investors need to focus on quality companies that are led by a management team focused on growth and creating value for its shareholders. The fundamentals of these companies have not changed and for this reason, we view this weakness as a buying opportunity.
Important Investor Disclosures
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