I admit it: I bought Cronos Group (NASDAQ:CRON) stock for all the wrong reasons.
I didn’t buy it because I understood it in a financial sense but because I thought I saw opportunity. The siren call of the marijuana industry lured me in and I bought it hook, line and sinker.
I should’ve heeded the warning when Aphria (NYSE:APHA) reported dwindling cannabis sales and pot stocks plunged. Cronos Group took it hardest. As CRON dropped, it hit a level that seemed to sing “bargain!”
If only.
Stoked by FOMO, I had pulled the trigger too soon and too short of the bottom. Since then, my position in CRON stock dropped by nearly double-digits. But I’ve got a shot to make things right.
If Cronos impresses the Street with its upcoming earnings report, I expect I won’t be the only profit-taker in town.
Here’s Why I’m Getting Out of CRON Stock
Price Targets Are Misleading: Cronos Group stock currently sports a cumulative analyst price target of $21.50 — that’s a 34% increase from its current perch of $16.05. Sounds great, right? Not exactly …
Analyst price targets may be a good metric to start with, but that figure can only tell you so much. If you simply go off of the price target and the monster gain it suggests, then things seem pretty good for CRON. Look closer, though, and you’ll see only two analyst price targets — $13 and $30. That’s a wide discrepancy.
The truth is, CRON has five hold ratings, three sells and only a single “buy” rating. Even if Cronos beats on earnings, it’s likely more analysts step in to give limited or lowered price targets.
It’s Speculation, Not Investing: Watching Warren Buffett speak has a way of clearing your thoughts. CNBC featured Buffett (and Charlie Munger) on Squawk Box this morning, with the two of them giving their fundamental reasons for buying and selling stocks.
One of Buffett’s truisms that sticks with me is that whenever you buy a stock, you should write down the following: “I am buying so-and-so stock because …” If your answer is “because my neighbor is buying it,” then that’s not enough reason for you to own the stock. When I look at my Cronos position, I really don’t like the answer.
I was greedy and hoping for a quick short-term boost. I should have bought a company with strong fundamentals and a proven business for the long-term instead.
Cannabis Isn’t the Boom We Expected: Everybody investing in marijuana stocks has to know that they’re speculating. These aren’t investments, they’re gambles. And gambling has a way of messing with your emotions.
The fact that CRON stock only brought in $6 million CAD in the past quarter, yet the stock is valued at nearly $6 billion, is a huge red flag. Alcohol companies, such as Constellation Brands’ (NYSE:STZ) massive stake in Canopy Growth (NYSE:CGC), bought into cannabis largely on the expectation legal marijuana would eat into alcohol sales. It hasn’t.
In the states where legal marijuana has the strongest foothold, alcohol sales have held steady. When you look at Canada, where national legalization was expected to be the catalyst for billions in sales, cannabis stores are selling less and less pot.
In December, cannabis sales totaled $57.3 million CAD ($42.96 million). But by February, cannabis sales had plunged to $49.89 million CAD ($37.38 million).
Bottom Line on CRON Stock
I was mistaken to think that the decline in marijuana stocks was a buying opportunity. The cannabis downturn represents something much more sinister to the fundamental case for pot stocks.
That is, cannabis isn’t going to be the overnight sensation that the talking heads on TV suggested. That’s not to say cannabis won’t be huge. It will be, but it’s going to take a lot of time.
And valuations will come down as expectations for the industry are tempered. But if you were to ask most investors the question Buffett posed, I doubt they’d have an answer for you. I know I don’t.
John Kilhefner is the Managing Editor of InvestorPlace.com. As of this writing, Kilhefner regrettably held a position in Cronos Group stock. If you have questions about the site or suggestions about our content, email us at editor@investorplace.com. Want to pitch us an article? Send your ideas and tips to investorplacestories@gmail.com, and if we like it, you’ll hear back from us!
