Cronos (NASDAQ:CRON) stock exists in a state of limbo. Attracting Altria (NYSE:MO) as an investor has dramatically increased the odds that Cronos will prosper. Also, unlike many marijuana stocks, it has not sold off in recent weeks.
Production and sales significantly lag not only market leaders but many smaller Canadian peers. Moreover, it supports elevated multiples in an industry that has seen both stocks and prices of dried cannabis fall over the last few weeks.
Given current conditions, profiting from CRON stock will likely mean embracing its future rather than its present.
Cronos Remains Top-Of-Mind Despite Modest Production
Despite lagging sales, CRON stock often gets classified with market leaders Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and Tilray (NASDAQ:TLRY). Their sales volumes come to only a small fraction of Canopy and Aurora. In the previous quarter, it reported sales of 1,111 kg of cannabis. In stark contrast, Aurora sold 9,160 kg, and Canopy sold a whopping 9,326 kg of cannabis in the fourth quarter ended March 31.
Moreover, with investors seemingly turning on the industry, the high valuations suddenly become more worrisome. With a forward price-to-earnings (PE) ratio of 51.77 and the price-to-sales (PS) exceeding 205, CRON stock appears expensive. Amid fluctuating profits, they still expect earnings increases to average 35.6% per year over the next five years. However, profit growth alone will not save CRON stock.
The Direction of CRON Stock Remains Unclear
For now, CRON stock has seen one thing that its peers have not in recent weeks—relative stability. Cronos stock experienced a massive surge early in the year followed by a significant pullback in the spring. As a result, it has a year-to-date return of about 42%. However, it trades at approximately the same price level where it sold in early May. This compares well to Cronos’s peers, most of whom fell throughout June.
Currently, CRON stock trades at about $15 per share. As our own Bret Kenwell wrote, it ideally needs to stay above $14 per share. For investors to see it as long, it needs to trade above $15.50 per share. Since mid-May, it has mostly stayed above a $14 per share level but has traded in a very tight range. Without a clear direction, knowing whether to buy or sell becomes difficult.
Wait for the Future CRON Stock to Buy
Given the current trading environment and the relationship with tobacco giant Altria, I would wait to buy. Still, thanks to the $2.4 billion investment from Altria, the Toronto-based cannabis firm garners more attention. Even with the negligible sales of last quarter, holding $2.4 billion gives the company some power.
I believe the long-term track of the industry-leading marijuana stocks will lead them to become slow-growth value stocks which pay generous dividends. Today’s marijuana industry is not slow growth, consists mostly of pricey stocks, and gives little thought to payouts as most companies do not turn a profit.
Under the tutelage of Altria, Cronos could become a different kind of company, assuming Altria does not buy it out. Having Altria as a partner allows them to take advantage of many of the production, distribution, and marketing experience that has served Altria for decades.
Finally, it could make CRON profitable and turn those profits into dividends that rise consistently. Once the excitement surrounding the cannabis industry fades, CRON stock can make a transition to becoming the Altria of the marijuana industry.
CRON Stock: Final Thoughts
Investors should hold off on CRON stock. CRON seems to have fallen into a range. With high valuations, dried cannabis prices falling, and the shares of most peers in decline as well, I see no catalyst that can push it higher.
The long-term picture looks more hopeful if they can boost their production. With Altria’s knowledge of a related industry and an extensive distribution network, marketing and distribution could become a matter of plug and play. All they have to do is produce and remove the legal hurdles.
The future of CRON stock as a growth play looks uncertain. However, due to its future as a possible income play, it needs to remain on investor watch lists.
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.