Canadian marijuana company Cronos Group Inc. (NYSE:CRON) has had a bumpy year … Despite a sharp pullback that took the share price down nearly 20% this week, Cronos Group stock has gained 64% over the past year.
The marijuana firm has been riding a wave of positive sentiment within the pot industry, but is it time to take profits?
CRON stock took a nosedive earlier this week, but the stumble could be an overreaction that offers investors a great entry point.
What Happened?
CRON stock has been hurt by two major factors this week — the first being an overall pullback in marijuana stocks following news that Aphria (NYSE:APHA) was fending off a takeover attempt from Green Growth Brands.
APHA’s board of directors refused an offer from Green Growth, and rightly so considering the offer price came in substantially lower than APHA’s share price. The news hurt the industry as a whole and therefore took CRON stock lower; however, the event has absolutely no impact on the company’s growth potential or business operations.
While the APHA news had an impact on Cronos stock, it was a downgrade from GMP Securities on Wednesday that can be blamed for the majority of its decline. GMP analyst Martin Landry lowered his rating on the stock from “buy” to “hold” with a price target of $18 (USD). Landry cited the stock’s 110% rise over the past year as reason for the downgrade, saying that the stock’s valuation had simply risen too far on too little news.
However, GMP still has a positive outlook on the stock. Landry said the firm’s tie-up with Altria Inc. (NYSE:MO) will be beneficial to CRON’s future and that he continues to believe in Cronos’ management team.
The Case for Cronos Stock
So, was the 20% decline warranted?
If you’re a believer in the marijuana market and Cronos’ position in the space, then no, the decline was heavily overdone … If you look carefully at the reasons behind CRON stock’s nosedive, you’ll notice that none of them have anything to do with the company’s overall growth story, operations or future. So, if you were considering jumping on board in 2019 but never pulled the trigger, now could be an excellent chance to take a position on a pullback.
Cronos is likely to benefit in the year ahead from the $1.8 billion investment from Altria. Not only will the company be able to speed up its growth using the influx of cash, but Altria has a lot of experience operating within a regulated industry, which should help guide Cronos through the ever-growing legal marijuana industry in the years ahead.
Speaking of legal marijuana — Cronos Group stock is also likely to experience a few major upswings in the year ahead as legalization continues to spread across America and into Europe. The ever-growing marijuana market is the prime reason to invest in marijuana stocks like Cronos, and there’s likely more good news on the horizon for the industry.
The Downside
On the other hand, CRON is still expensive even with the recent pullback. The company isn’t profitable yet but still trades at a valuation that will give you a nosebleed. Plus, the fact that the marijuana industry changes so rapidly means that Cronos Group stock, as well as its peers, are likely to see a great deal of volatility in the short term. This week’s sudden slide is a great example of what investors can expect.
Landry had a point — CRON could be out over its skis at its current price. If you already own CRON stock, you might want to think about taking profits and waiting for a better entry point.
The volatility that comes with the marijuana market isn’t going anywhere, and this won’t be Cronos’ last major swing. That means it might be worth waiting for CRON to make its way back toward $20 per share before jumping in with both feet.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
