Currently, one of the most exciting areas to invest in is in cannabis. Traders are flocking into it and often in a reckless manner. This has created opportunities and pitfalls, so new investors need to do a little homework and some soul searching before allocating risk to it. Of the bunch, Cronos Group (NASDAQ:CRON) is now the shining star.
CRON stock is up 180% in three months, but it still lags Tilray (NASDAQ:TLRY) if you consider the past 12 months. This year, CRON still rules the stock price race. Canopy (NYSE:CGC), Aphria (NYSE:APHA) and Aurora (NYSE:ACB) are close behind.
Much of the hoopla in these companies originates from future prospects. The current sales are minute. And their profit and loss statements are more losses than profits. Furthermore, the market capitalizations are out-of-whack with reality. For example, CRON has a market cap of $4 billion with only $12 million in sales (over the trailing twelve months). This is an egregious ratio that normally doesn’t attract anything but criticism.
Nevertheless, they are real businesses pursuing a young area of operations that are still controversial in many parts of the world. Oddly enough, the concept of cannabis investing is the most popular one on Wall Street and Main Street these days.
Morals aside, the concept has attracted real money from giant companies who want in on the potential. Most notable perhaps was the $4 billion investment that Constellation Brands (NYSE:STZ) did in CGC. Clearly, the consensus is that cannabis has much potential … but we’ve yet to nail down the specifics.
The news streams are littered with rags-to-riches stories of those who invested in pot stocks when they were trading for pennies, and now they are swimming in cash. This reminds me of the bitcoin craze in 2017. Investors almost always like to go to extremes but that doesn’t discount the real potential.
This is all to say that the cannabis investment thesis is too young to ignore just yet. So there still is upside potential in CRON stock for as long as the concept is alive. Yes, it is hard to chase a stock that has more than doubled in under a month. But, in this case, logic need not apply; just look at the sales-to-market-cap ratio.
Hyper-momentum stocks like Cronos are near impossible to trade. They never give us a clear entry point, so if I wait for the perfect time to buy it I would perhaps never own it. In this case, I could trade CRON stock technically, but considering its ascent speed, I have nothing against which to shoot.
Even then, it would be impossible to manage winnings because it would be difficult to set proper stop levels. So it is probably best to invest in the concept and let time do the work.
So I’d prefer to buy it and forget it for a while. This way I give the industry and Cronos stock time to prove that they are worthy of my investment. With the amount of attention and the money that is pouring into the field from legitimate companies, there must be more potential to come. You really have to believe in the marijuana industry …
The one thing I don’t do is short the sector using conventional fundamentals.
I’ve learned that betting against the masses is often a losing proposition regardless if I am right of wrong. This is where the “don’t fight the tape” meme comes from.
For those of us who still want to trade CRON stock, hope for a consolidation period soon. This is when a stock stalls and spends some time trading sideways. This would establish a platform from which the bulls can continue higher.
Cronos stock would also need the help of markets in general and there could be hope there. Sentiment on Wall Street has once again flipped to bullish and the buyers are back in control. There still is the threat of political rhetoric as we await on drama to unfold soon.
The U.S. and China are within weeks of either resolving their difference over tariffs or blowing the thing up into another correction. And U.S. politicians will soon have to face off over resolving the spending limit and the budget.
This is all to say that trading CRON for the next few weeks could be bumpy but this should not sway investors today. Considering the macro uncertainties and the sector threats, I’d make my investment small enough for it to not break my heart or the piggy bank.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.