Despite the optimism going into 2020, the cannabis sector has been struggling. Aurora Cannabis is receiving much of the blame for this, as it recently announced that they got rid of their CEO and they’re facing an imminent goodwill write-off.
Shares of Cronos Group (CRON) have also sold off but we remain bullish on the stock, especially when comparing it to its peers.
Many cannabis companies have balance sheets with limited amounts of cash. However, Cronos Group has plenty of cash due to Altria Group’s $1.8 billion dollars investment in 2018, which they made in exchange for a 45 percent stake in the company.
Cash is so important to cannabis companies at this time because there is an unexpected bottleneck in the Canadian retail market. If the companies can’t sell their products, they can’t bring in revenue, which they need to pay their bills, pay salaries, and expand.
Cronos Group has the capital to not only sustain this downturn until retail conditions improve but they also have enough capital to acquire solid businesses for multi-year low valuations, if they so choose.
An analyst at Raymond James recently had some encouraging words for Cronos Group investors. On February 7, Rahul Sarugaser reiterated his “outperform” rating for Cronos Group and said that it is “an overlooked gem in the cannabis sector.”
He applauds the company’s partnership with Altria Group and says they have massive potential in US CBD markets.
In a note released to his clients, Sarugaser discussed the slower-than-expected rollout of cannabis retail stores in Canada and the supply glut that is weighing on the sector. He said that these factors really took a toll on the companies which brought valuations down substantially. He thinks that cannabis companies will continue with their poor performance in the upcoming fourth quarter.
Sarugaser said, “We expect these continuing sector headwinds to drive the second bottom we predicted would occur in February or March 2020. We predict a rebound among strong, fiscally prudent operators beginning ~May 2020, materializing more fully in 2H20 with the realization of Cannabis 2.0 sales and, perhaps, the expansion of retail cannabis store footprint across Canada, particularly in Ontario, driving accelerated sell-through.”
Sarugaser thinks that by the end of the fourth quarter of 2020, there would be a wide gap between the companies that are well-capitalized, like Cronos Group, from others.
Cronos Group is well-positioned in this environment and could be a solid investment for investors looking to get involved in cannabis stocks.
CRON shares were trading at $6.84 per share on Thursday afternoon, up $0.11 (+1.63%). Year-to-date, CRON has declined -10.82%, versus a 4.93% 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...