As we kick off the first week of trading for the new year many investors will be looking to add solid growth picks to their portfolio. Last week we saw cannabis stocks skyrocket on the last day of trading and many are wondering if this will be the start of a huge rally for the sector.
Among the biggest gainers was Cronos Group (CRON) which soared over 15%. Will these gains continue in 2020?
Just over a year ago, tobacco giant Altria invested $1.8 billion into Cronos Group for a 45 percent stake. As a result, Cronos Group had CA$1.5 billion in cash on the balance sheet as of September 30, 2018. This cash on Cronos Group’s balance sheet was key in strengthening the company in 2019, especially as cannabis stocks plunged in the second half of the year.
Also, the more cash Cronos Group has on its balance sheet allows them to take advantage of future investment opportunities like acquiring a major competitor at rock bottom prices. Cronos Group spent a whopping $906 million on its investment initiatives.
One issue plaguing Cronos Group is its lack of revenue growth. The company generated net revenues of just CA$29 million in the past three quarters and investors are getting impatient. If revenues do not grow substantially in 2020, it may be hard to convince investors that Cronos Group has a promising future as a leader in the cannabis space. Comparing Cronos Group to its competitors, they are far behind them in terms of revenue.
Cronos Group is looking to grow revenues in 2020 with the launch of Cannabis 2.0, which is Canada’s legalization of cannabis derivative products, including cannabis-infused beverages, edibles, and concentrates used in vaping.
Another important catalyst for Cronos Group’s efforts towards profitability will be Ontario’s (Canada’s most populous province) push to open up more cannabis retail locations in 2020. Ontario’s goal is to approve about 20 retail stores per month, leading to 250 new locations being opened this year. If that can happen Cronos Group could begin to see a real improvement in its bottom line.
Cronos Group is by no means “out of the woods” as we enter into 2020. However, some of Wall Street is bullish on the company. Just a few months ago, Stifel analyst Andrew Carter upgraded Cronos Group to “buy” from “hold,” although he lowered its price target to $14.00 from $16.50. His price target of $14 assumes a seven times enterprise-value-to-sales multiple on Stifel’s full-year 2021 sales estimate. Stifel estimates CA$450 million in sales in 2021, driven by Cronos Group taking a leading position in the vapor segment.
If Cronos Group can continue to invest in key acquisitions, take advantage of Cannabis 2.0 and Ontario follows through with allowing more cannabis retail locations to open, the company could see a much better year than it did in 2019.
CRON shares were trading at $7.16 per share on Friday afternoon, down $0.20 (-2.72%). Year-to-date, CRON has declined -6.65%, versus a 0.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...
