Cronos Group (NASDAQ:CRON) has established its own trend. Thanks to the $1.8 billion investment that CRON received from Altria (NYSE:MO) in December, Cronos is one of the few pot stocks whose 52-week high didn’t come right before marijuana became legal in Canada in October.
After that announcement, CRON stock began a bull move that peaked in March. Unfortunately, CRON stock has fallen since that time. Since there’s no apparent upcoming catalyst that can break that downtrend, traders don’t have an incentive to take a chance on Cronos Group stock.
CRON Stock Can’t Become a Market Leader
Since reaching a near-term peak of $24.37 per share on Mar. 6, CRON stock has steadily slid. Now many wonder when the decline will end.
Many people were bullish on CRON stock after U.S. tobacco giant Altria acquired a stake in the company. Because the cannabis and marijuana industries have certain similarities. I think this alliance will give Cronos some added expertise in the areas of production, distribution, and marketing. It also reminded many of Constellation Brands’ (NYSE:STZ) investment in Canopy Growth (NYSE:CGC) that made CGC a market leader.
However, for all of the talk about CRON stock, analysts only expect CRON to produce about 130,000 kg of pot this year. That trails smaller firms such as Aphria (NYSE:APHA) and The Green Organic Dutchman (OTCMKTS:TGODF).
Valuation, Charts Show Little Reason to Buy Cronos Stock
Marijuana stocks remain highly speculative. For traders to take a chance on a marijuana stock, they need some reason to believe that they can sell it at a higher price later. Because CRON lags some smaller firms in production, it has little chance of leading the industry. Today Aurora Cannabis (NYSE:ACB) and Canopy Growth have emerged as industry leaders.
The multiple of CRON stock also doesn’t give investors a reason to buy the shares. Cronos stock currently trades at around 355 times CRON’s sales. While that might appear elevated, it compares well to other cannabis equities in today’s market.
CRON does deserve credit for earning a profit. Cronos Group reported a first-quarter GAAP profit of 48 Canadian cents (36 cents) per share. CRON predicts that its 2019 EPS will come in at 52 Canadian cents (39 cents). That would gives CRON a price-earnings ratio of about 35.6. However, due to an expected decline in CRON’s EPS to 7 Canadian cents (5.2 cents) in 2020, its forward PE comes in at 290.
That valuation leaves investors with little incentive to buy Cronos stock. I have made successful short-term trades in the past in both Aphria and CannTrust Holdings (NYSE:CTST), due to their relatively low multiples. It is possible to find stocks with attractive valuations in the cannabis space. Unfortunately, that does not apply to CRON stock at this time.
Finally, the recent price movements of Cronos Group stock also won’t help traders much. From a technical perspective, InvestorPlace columnist Bret Kenwell thinks that Cronos stock has support in the $13-$14 per share range. However, if CRON falls below that level, it could return to the single digits. Over the last year, it has appeared to build a floor in the $6 per share range. Cronos stock would be attractive at that level. Still, it will probably not reach that price anytime soon.
Final Thoughts on CRON
There’s nothing attractive about Cronos Group stock for investors or speculators. I can see a lot to like about Cronos Group’s business. Its alliance with Altria should help it with production, distribution, and marketing. Also, the fact that it earns a GAAP profit will place CRON in a strong position compared to many of its peers.
Unfortunately, none of those advantages make Cronos Group stock attractive. Cronos’ production levels lag those of market leaders such as Aurora and Canopy. The valuations of those names are also more favorable than that of CRON stock, closing off any chance that CRON could be seen as a relative bargain. Moreover, while Cronos stock could bounce off of key resistance points, the stock’s floor is well below its current levels.
I have stated on many occasions that marijuana equities like CRON stock will eventually become low-multiple, dividend-paying equities like the Altria of today. Until CRON develops those characteristics, or at least finds a more solid floor, I would look to own other equities in the cannabis space.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.