This Cannabis Stock’s Recent Decline May Be an Opportunity

Since February, cannabis maker Cronos Group (NASDAQ:CRON) has been on a downward slide. Note that CRON stock has gone from $22 to $15.30.

Yet keep in mind that the poor performance of Cronos Group stock has not been an outlier. General bearishness towards marijuana stocks has become prevalent. Just look at companies like Tilray (NASDAQ:TLRY) and Aphria (NYSE:APHA).

Among the reasons for the slide are that the sector has already had a big run-up, there are concerns about marijuana supply, and pricing has been showing some weakness.

The weakness of CRON stock may be an opportunity, even though the valuation of Cronos Group stock is still not attractive.

Even following the decline, CRON stock is still trading at nose-bleed levels.

Consider that the market cap of CRON stock is at $5.2 billion, while its first-quarter sales came in at a mere CA$6.5 million.

That kind of valuation is reminiscent of the wild dot-com boom of the 1990s.

There are also some nagging issues with the fundamentals of CRON stock. Perhaps the most important problem is its production or lack thereof. In Q1, its production soared 122% year-over-year, but it still only made 1,111 kilos. That is relatively low, compared to other major cannabis players like Canopy Growth (NYSE:CGC).

While this is worrisome, there are still notable bullish factors. In fact, in terms of production, CRON has been investing heavily in expanding its capacity. To this end, the company’s Building 4 facility — which is 286,000 square feet — will soon come online.

Next, another big advantages for CRON stock is its balance sheet. Tobacco powerhouse Altria (NYSE:MO) invested a hefty CA$2.4 billion in Cronos Group stock for a 45% stake in Cronos. In other words, CRON will have more than sufficient resources to bolster its production.

But the MO deal will be more than just about capital. There will also be major synergies that should help to accelerate the growth of CRON and boost Cronos stock. Examples include:

  • MO brings deep capabilities of design, manufacturing, marketing, distribution and commercialization.
  • The company has expertise that can help with cannabis vape products.
  • It has a strong background in dealing with complex regulatory issues, including taxes, product registration, shipping, licensing and government affairs.

The Bottom Line on CRON Stock
Even with the volatility of CRON stock, it’s important to keep in mind that the growth prospects of the cannabis industry still look very promising. Based on research from the United Nations, about $150 billion is spent on cannabis across the globe, and there are roughly 180 million people who consume cannabis.

There is also the quickly emerging category of cannabidiol (CBD) — a compound found in the sativa plant that does not produce a high – which has shown medical efficacy. Congress’ legalization of CBD is expected to turn it into a big market in the U.S. Brightfield Group forecasts that the market will be worth $22 billion by 2022.

CRON stock is positioned nicely to benefit from these trends. But more importantly, the company has the scale, infrastructure, brands and resources to be a long-term winner.

— Tom Taulli

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Source: Investor Place