CRON Stock Is a Long-term Play With Near-Term Challenges

Currently, legal marijuana is one of the most exciting investment sectors. It also appears a resilient sector as well. After demonstrating evidence of being technically overbought, Cronos Group (NASDAQ:CRON) put up a remarkable performance, up 19% in just two days of trading. For the year, CRON stock has gained 70%.

So what drove sentiment midweek? Two factors are at play. Cronos announced a partnership with Aleafia Health (OTCMKTS:ALEAF). The scope of the deal involves evaluating cannabis for treating insomnia and daytime drowsiness.

But the second factor is likely more significant. Canadian cannabis firm Tilray (NASDAQ:TLRY), which recently received federal regulatory approval to import marijuana into the U.S. for medical research. TLRY experienced a dramatic surge, skyrocketing over 38% on Wednesday. Therefore, many investors anticipated that a rising tide would lift Cronos stock.

A few lesser-known companies, including Aleafia, also experienced a bump up on Tilray’s good news.

However, CRON stock received a higher portion of the rewards due to the underlying company’s core business. As I wrote two weeks ago, Cronos initiated a landmark deal with custom-microbe producer Ginkgo Bioworks. Gingko will produce cannabinoid (CBD) strains without the psychoactive component delta-9 tetrahydrocannabinol, which you (or your “friend”) know as THC.

Successfully developing a THC-free version of CBD will be huge for the medical-cannabis industry. It’s a workaround for otherwise strict federal regulations against marijuana; hence, the speculative money towards Cronos stock.

Moreover, Cronos’ business aligns with Tilray CEO Brendan Kennedy’s vision for legal marijuana. In a recent interview, Kennedy stated emphatically that pharmaceuticals and beverage-makers must seek partnerships with cannabis firms for longer-term viability.

Of course, Cronos is actively seeking such arrangements.

CRON Stock Is Risky in the Short Term, But a Winner in the Long Term

The recent jump in Cronos stock represents the complicated nature of this investment. On one hand, Tilray’s CEO laid out the logical pathway of legal marijuana. But on the other hand, CRON has nearer-term risks.

What Kennedy suggested isn’t without precedent. For example, famed drug-maker AbbVie (NYSE:ABBV) has a cannabis-related therapy called Marinol. This drug alleviates painful symptoms associated with chemotherapy, and helps AIDS patients with appetite restoration.

Other examples include Constellation Brands (NYSE:STZ) owning a substantial stake in Canopy Growth (NYSE:CGC), with plans to invest more. Molson Coors Brewing (NYSE:TAP) recently signed a joint venture with Hydropothecary (OTCMKTS:HYYDF).

CRON stock could benefit beyond these established synergies because of Gingko’s scientific expertise. Presently, extracting CBD is an onerous and expensive process, which involves producing new cannabis plants. Gingko aims to bypass the planting process by extracting CBD through fermentation.

If successful, Cronos could theoretically mass-produce CBD, which would moon CRON stock.

But before you get too excited, we have the obvious problem that Gingko must succeed in this endeavor. That’s part of the reason why CRON and Gingko have production-threshold stipulations built into their contract.

Next, you must consider that Cronos doesn’t currently have high-level partnerships with mainstream beverage-makers or pharmaceuticals. For management to attract the alpha dogs of the target industries will require significant effort.

But the biggest nearer-term risk is market volatility. Citron Research’s Andrew Left had a field day with CRON stock, publishing what he termed a “reality check.” In it, he cited doubts about the company’s production capacity and potential, eventually sinking shares.

Naturally, every new investing sector will feature naysayers. But Cronos stock is particularly vulnerable due to overall legal ambiguities.

The Bottom Line for CRON Stock

I’ll reiterate my opinion regarding CRON stock: this is an investment that has tremendous upside potential, but one that will face choppy waters. If you are risk-tolerant, you’ll likely be very happy with CRON five years out. If you’re risk-averse, you may want to sit this one out for a while.

Either way, I don’t see Cronos stock as a buy right now. While shares did jump almost double-digits Wednesday, recent trades have gyrated wildly. And despite the move, shares aren’t dramatically higher from when they first went bonkers in late August.

Plus, I’m leery of the short-traders. Left made great money shorting CRON stock recently. Now, with the price back to where it was pre-Left, this will entice the bears. Let them have their way, and reengage this idea with less resistance.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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