Cramer Blasts Cannabis Sector Amid CannTrust Scandal That ‘Keeps Blowing Up’

The cannabis sector is dealing with two notable scandals that is impacting the industry as a whole, CNBC's Jim Cramer said during his daily "Mad Money" show Wednesday.

Investors should be selective in their exposure to the space and be prepared to gradually buy best-of-breed names on the way down, the CNBC host said. 

What Happened

The first of two recent scandals is CannTrust Holdings Inc (NYSE:CTST), which was caught manufacturing cannabis in unlicensed rooms, Cramer said.

The other is Curaleaf Holdings Inc (OTC:CURLF), which was warned by the FDA to remove certain language from its website and social media accounts that contained unsubstantiated treatment claims.

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Why It's Important

CannTrust's stock rose from less than $2 in August 2017 to north of $10 by October 2018, as investors were attracted to lofty growth expectations.

CannTrust was expected to produce as much as 300,000 kilos of cannabis by the end of 2020, but is instead are grappling with a scandal that "keeps blowing up," Cramer said.

Curaleaf's stock nearly tripled in value from late 2018 to April 2019 and, much like CannTrust, investors are experiencing a scandal, Cramer said.

While the FDA made it clear in its letter to Curaleaf that all it needs to do is "change how they label" certain items, it is now evident the regulatory body is "starting to flex its muscles against cannabis," he said. 

Investors no longer care about growth stories and are for the first time prioritizing "actual results," Cramer said.

What's Next

Investors should stay away from companies that only offer investors "vague plans" or are losing a lot of money, Cramer said.

Instead, he said they should focus on well-capitalized leaders like Canopy Growth Corp (NYSE:CGC) and Cronos Group Inc (NASDAQ:CRON).

These two stocks are long-term plays, and investors should be "prepared to buy them gradually on the way down," he said. 

Curaleaf shares were down 0.86% at the time of publication Thursday, while CannTrust shares were down 3.4%. 

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