Cronos Group (NASDAQ:CRON) ranked as one of the top Canadian marijuana stocks of 2018. It was one of the hottest marijuana stocks last month. Even better, it stands as the best-performing marijuana stock of all time.
But Cronos is slipping. Its share price fell by a double-digit percentage during the first couple of weeks of February. Should investors consider buying this high-flying marijuana stock on the dip? Or are the good times possibly coming to an end for Cronos Group?
Why Cronos slipped
Probably the biggest reason shares pulled back was an analyst’s downgrade. GMP Securities analyst Martin Landry lowered his rating on Cronos from a buy to a hold on Feb. 5.
Does Landry think that Cronos Group’s management is making mistakes? Has Cronos Group’s production capacity been impaired? Have the company’s prospects at home in Canada or in international markets dimmed? No, no, and no.
GMP Securities downgraded Cronos Group simply because Landry thought that “shares need a breather.” And his reduced rating helped ensure that the stock got that breather.
That’s really all there is to the story. Cronos Group hasn’t slipped due to anything pertaining to its business fundamentals. The pullback is a result of investors deciding that a stock that’s enjoyed a huge run-up — more than 170% over the last 12 months even with the recent slide — is due for a pullback. I know that sounds like circular logic, but it’s applicable logic in this case.
Why it could fall even more
However, just because there are no fundamental reasons for concern about Cronos Group now doesn’t mean that there won’t be any in the future. Things can change quickly.
It’s important to remember that its market cap has soared to more than $3.5 billion on minimal sales. In its last reported quarter, the company made only 3.8 million in Canadian dollars (less than $3 million). Pretty much all of Cronos Group’s valuation hinges on expectations of tremendous growth.
There are lots of ways those expectations might not be met. Cronos might not be able to increase its production capacity as quickly as needed to meet demand, and lose to other companies that are able to do so. It’s possible that global demand for marijuana won’t grow as much as expected. Countries that have recently legalized medical marijuana could take longer than anticipated to build viable markets. Countries that many hope will allow legal marijuana (primarily the U.S.) might not do so anytime soon.
Even if the fundamental picture for Cronos Group doesn’t deteriorate, there’s no way to know for sure how long its current breather might last. If the company’s next quarterly update isn’t overly impressive and there are no other positive catalysts, Cronos stock could potentially languish for months.
The big picture
Now that I’ve painted the picture for what could happen with Cronos, let me explain what I think is most likely to happen.
First, I fully expect the company will report sizzling sales growth in its next quarter. This will be the first quarter to include revenue from the recreational marijuana market in Canada. I think it’s likely that Cronos will enjoy a bump from its next quarterly update in a few weeks, ending the pullback if it hasn’t already ended before then.
I also think that the Canadian government will meet its goal of opening the legal market for cannabis edibles, beverages, and concentrates used in vaping in October 2019. This new market should provide another boost for Canadian marijuana stocks, including Cronos.
My take is that Cronos Group will begin to reap the rewards from its partnership with tobacco giant Altria later this year. This relationship is more important than just the money that Cronos will receive, although that’s not an insignificant factor.
Altria CEO Howard Willard said a few weeks ago that “there are opportunities really across the world in a variety of product categories, both recreational and medicinal, that would involve [Cronos] entering new product forms and developing new products and new product brands.” His words underscore that there’s a much bigger opportunity before Cronos than what we’ve seen in the past or even what we’ll see in much of 2019.
I think the big picture for Cronos Group continues to look very good. The current breather is probably nothing more than a breather for this high-flying stock. Buy Cronos on the dip? In my view, that sounds like a pretty good move for aggressive investors.
Cronos Group Inc. shares were trading at $20.41 per share on Tuesday morning, up $0.97 (+4.99%). Year-to-date, CRON has gained 96.44%, versus a 9.41% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of The Motley Fool.