CannTrust expected to be dropped from the S&P/TSX composite at the end of September

Open this photo in gallery:

CannTrust Holdings Inc. is likely to be dropped from Canada’s benchmark stock index this month, the latest setback for a company that was rocked this summer by a Health Canada investigation into unlicensed cannabis production and subsequent executive departures.

CannTrust is a member of the S&P/TSX Composite Index, a group that includes 239 public companies. Its stock price is down 60 per cent since early July, when the company announced it had breached federal regulations by growing marijuana in rooms that were not approved by government. Health Canada is expected to hit CannTrust with sanctions; the most severe possible penalty would be the loss of its licence to legally grow cannabis.

The slide in CannTrust’s value has put its market capitalization at about $335-million, well below the threshold for membership in the index. Analysts at investment dealer AltaCorp Capital Inc. said in a report last week that the stock is likely to be deleted from the S&P/TSX benchmark. This past Friday, CannTrust declined to comment on potential changes to the index.

AltaCorp managing director Chris Murray said that, as a rule, index investors hold about 5.5 per cent of a company’s public float and sell the stock when a company is dropped. Removing the cannabis producer from the index would trigger a wave of selling, as index investors own approximately 4.8 million shares in CannTrust.

Passive investors such as index funds and exchange-traded funds can set off significant short-term price swings as they move in and out of a stock.

On a Friday afternoon in mid-August, CannTrust’s share price jumped 40 per cent in the final hour of trading. The move was subsequently traced back to purchases by ETFs such as the US$1-billion ETFMG Alternative Harvest ETF, which acquired about 5.5 million CannTrust shares, according to data compiled by Bloomberg. Mr. Murray said share-price moves are typically less dramatic when the index is adjusted, as hedge funds and investment dealers make investments in advance of the changes that smooth trading on the day stocks enter or exit the index.

S&P and the Toronto Stock Exchange are expected to announce changes to the index on Sept. 13, and add or drop stocks at the close of trading the following Friday, Sept. 20.

Membership in the index is determined by formulas that include the stock’s weighting in the overall index, with a company’s public float needing to account for at least 0.04 per cent of the S&P/TSX composite. AltaCorp calculates that CannTrust’s public float currently accounts for just 0.012 per cent of the overall index.

Other candidates to be dropped from the index are NuVista Energy Ltd., Precision Drilling Corp., Western Forest Products, Kelt Exploration Ltd., Birchill Energy Ltd., Sierra Wireless Inc., Peyto Exploration & Development Corp. and NewGen Energy Ltd., according to AltaCorp.

Tech company Lightspeed POS Inc., which went public in March and has a $3.7-billion market capitalization, is a leading candidate to join the S&P/TSX composite in September, according to AltaCorp. Equitable Group Inc., Minto Apartment Real Estate Investment Trust, Wesdome Gold Mines Ltd. and Corus Entertainment Inc. are also potential additions.

Another TSX-listed cannabis company, Charlotte’s Web Holdings Inc., is also a candidate for the domestic benchmark. The company has a $2.2-billion market capitalization. However, Mr. Murray said members of the S&P/TSX member committee will need to decide if the business is truly Canadian, as its head office is in Boulder, Colo., and its operations are almost entirely in the United States.

The committee may also choose to welcome new, Montreal-based members to the S&P/TSX 60 Index, a benchmark of blue-chip companies, and drop another iconic Quebec-based name. Mr. Murray said industrial companies are underrepresented in the S&P/TSX 60 compared with the broader composite index.

The problem could be fixed by welcoming a relatively large company such as Air Canada, CAE Inc. or WSP Global Inc. and dropping current index members Bombardier Inc. or SNC-Lavalin Group Inc., which are smaller companies by market capitalization. AltaCorp’s research shows index-based investors will acquire about 2.5 per cent of a company’s public float when its shares go into the S&P/TSX 60.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.