Cronos Group (NASDAQ:CRON) may be a favorite among investors who believe in the marijuana movement currently underway, but the analyst community is suspiciously unenthused about Cronos stock. In the midst of a relatively indiscriminate cannabis-mania, the pros collectively say CRON is a name one would want to steer clear of than step into right now.
Granted, some of that concern stems from a recent runup. Prior to the move to an all-time high above $25 in February, analysts were decidedly bullish. Those stock-pickers dialed back their enthusiasm rather than raise the bar, however. It was a relatively unusual move given the temperature and rhetoric surrounding most cannabis stocks.
It also is a subtle sign that the market is finally starting to compare some marijuana stocks to others, and are finding Cronos Group lacking.
A Look at Cronos Stock
Since February, three analytical firms have downgraded Cronos Group stock. Three more initiated coverage of the pot player during the same timeframe, though the company likely wishes it hadn’t attracted the attention. Of the three, two rated CRON stock at “Underperform.” The third, Cowen & Co., managed to rate it “Market Perform.”
It’s not the norm. The pros love Canopy Growth (NYSE:CGC), with the majority of them calling it a “Strong Buy.” Ditto for Aurora Cannabis (NYSE:ACB). Even Tilray (NASDAQ:TLRY), which has a clear valuation challenge, has garnered a handful of “Buy” ratings and is mostly a “Hold.”
Not CRON stock though. It’s a “Sell,” rated as such by a crowd of professionals that hasn’t been shy about doling out bullish opinions on companies that are nowhere near profitable.
What gives? The concerns have been somewhat cryptic, but become clearer in the aggregate.
The crux of the concerns focus on the stock’s valuation.
All marijuana stocks are overvalued, to be clear. Investors are jockeying to take on relatively cheap stakes in light of what might be in the future. Canada’s legalization of recreational pot is still new, and most U.S. states have yet to legalize marijuana, though things are moving in that direction.
Even then, however, Cronos stands out for all the wrong reasons.
BMO Capital Markets Tamy Chen noted along with her downgrade of Cronos Group stock in March that the then-share-price was 85 times its trailing EBITDA (earnings before interest, taxes and depreciation).
For perspective, Tilray stock at the time, another marijuana stock analysts aren’t exactly in love with, was priced around 70 times its EBITDA. A well-loved Aurora Cannabis, at the other end of the spectrum, was priced at 40 times its trailing EBITDA.
It’s not just an alarming comparison to its peers though; investors would be willing to take an expensive shot if the potential were in place. Cronos doesn’t appear to have enough certain potential either.
As of the most recently reported quarter, though Cronos is one of the market’s biggest marijuana stocks as measured by market cap, it’s far from one of the biggest producers of marijuana. Assuming it reaches peak capacity from its existing and planned production facilities, the company will do well to grow 120,000 kilograms per year by 2021. Much smaller companies already have much more growing potential.
Cronos also appears to be losing out to rivals in terms of setting up international distribution deals.
Bottom Line for Cronos Stock
Analysts aren’t suggesting Cronos Group is doomed. They know it isn’t. Most of its critics even concede CRON stock could earn a spot as one of the top plays among marijuana stocks.
CIBC World Markets analyst John Zamparo is one of those conflicted analysts:
“Cronos management has been far more reluctant than [its] peers to reveal capital allocation plans, particularly on the U.S. CBD industry…But we believe the company’s capital deployment track record and asset-light approach give us conviction [that] capital will be deployed with discipline and a focus on long-term [return on invested capital].”
Matt Bottomley agreed: “Although we believe Cronos’ valuation has gotten ahead of its fundamentals, we also note that the company has compiled a number of strategic initiatives that could eventually unlock longer-term value.”
Even those optimistic commentaries, however, use the word “could” in a way that heavily hedges that optimism. Very few analysts actually believe in the company enough to call it much better than a “Hold.”
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.