Although the cannabis industry is the fastest growing industry in the world, investors need to be selective and conduct thorough due diligence before investing.
When it comes to the cannabis industry, it all starts with the management team and it is important than ever to know who you are investing in.
One of the most important metrics to consider when it comes to analyzing a management team is the history of insider transactions. While not all insider transactions are bad or detrimental to the company, the person that is at the center of the transaction is if the upmost importance.
Today, we want to highlight Terra Tech (TRTC) which recently reported substantial insider sales and find this to be significant since the company claims to be in the middle of a major turnaround.
Terra Tech CEO and CFO Dump 2.3+ Million Shares
Terra Tech was one of the first publicly traded cannabis companies and has a significant following. The company is focused on two of the most exciting legal marijuana markets in the United States and has significant growth potential (California and Nevada).
After Terra Tech reported its second quarter financial results in August, CEO Derek Peterson said that he expects the company to generate between $38 million and $40 million in revenue in 2017. For this reason, we find the recent sales by CEO Peterson and CFO Michael James to be a red flag.
Although we found the timing of the sales to be concerning, the size of the sales was the most unsettling. Over the last week, CEO Peterson sold more than 1.8 million shares while CFO James dumped 500,000 shares.
Recognizing a Pattern
While we do not find there to be anything wrong with insider sales, we do get concerned when we see such large sales as well as repetitive sales.
When a company like Terra Tech (which is supposed to be in the middle of a major turnaround) reports such large sales by its CEO and CFO, it raises significant doubt about the company’s future.
Over the last two years, Terra Tech insiders have consistently sold stock so the recent sales may not come as a surprise to some people. We have been monitoring this trend closely and remain cautious with TRTC.
Is Terra Tech at Risk?
Over the last few years, we have been cautious with Terra Tech and think that the company has too much on its plate. Terra Tech needs to refine its focus and divest a subsidiary (i.e. Edible Garden) to raise capital.
Terra Tech has attempted to raise capital on several occasions but has been unable to do so. For this reason, we believe that the company needs to sell one of its assets to raise the capital it needs. While we see value in the Edible Garden subsidiary, the sales have a very low gross margin and does not add to the bottom line. Terra Tech’s cannabis division has seen strong revenue growth and the gross margin is substantially higher. It would make sense for the company to sell Edible Garden and invest the proceeds in its cannabis division.
We remain cautious with Terra Tech and will continue to monitor company activity closely. Insider selling is typically a red flag and warrants further analysis. Terra Tech has a long history of insider selling and we plan to proceed with caution.