It’s been a summer to forget for marijuana stock investors. While general market traders are complaining heavily following last week’s trade war escalation and resulting stock market rout, for the marijuana sector, the pain is nothing new.
Since March, in fact, there have been no meaningful rallies in marijuana stocks at all, with the sector benchmark Alternative Harvest ETF (NYSEARCA:MJ) getting pounded for a more than 30% loss during that span. And industry leader Cronos (NASDAQ:CRON) stock hasn’t been immune from the selling pressure.
It’s not letting up either. In fact, many marijuana stocks performed particularly badly last week as the combination of general market selling and terrible quarterly results sent pot shares into freefall.
Canopy (NYSE:CGC) had a particularly lamentable quarter. Behind all the hype around the record harvest, Canopy’s financial numbers were as bad as ever. Lump that in with more disappointment from Tilray (NASDAQ:TLRY) and investors and traders simply want out of the pot stocks at any price. Tilray is especially an alarming warning on the shifting sentiment in the pot space; TLRY stock is, incredibly, down 90% from its peak share price last year.
Cronos Still Has Solid Fundamentals
As I’ve written about previously, I like what I see in Cronos’ business strategy. Rather than expanding at all costs, Cronos has managed its growth rate and taken its time planning its business strategy. For example, revenues just topped $10 million this past quarter. That’s not huge by marijuana company standards but it has helped keep its losses manageable as well.
On the plus side, even after the $300 million Lord Jones acquisition, which gives Cronos entry into the U.S. CBD market, Cronos has a formidable $2 billion cash hoard left. This gives the company all sorts of time to see how the marijuana industry evolves in Canada, the U.S., and overseas. That’s in stark contrast to other firms that have already burned through most of their cash and now face dire prospects if marijuana pricing continues to slide.
Cronos Group Stock Is Following Canopy on Down
If you’re trying to figure out where CRON stock is going to trade, Canopy is a great benchmark to use. That’s because Canopy and Cronos are the two marijuana companies that received the biggest outside investments. Cronos has its Altria (NYSE:MO) backer, while Constellation Brands (NYSE:STZ) bankrolled Canopy.
Remember that, at the time of both investments, cannabis companies were still looking for credibility. The huge investments from established cigarette and alcohol companies instantly vaulted Canopy and Cronos ahead of the pack, leading to massive rallies in their share prices.
Constellation invested in Canopy at an average price of roughly $33 per share. After this investment, CGC shot up to as much as $57, offering Constellation a huge paper gain. Traders that followed Constellation’s lead also scored big — if they sold in time.
However, Canopy’s stock has subsequently collapsed. It broke below Constellation’s buy-in price in July and has now sunk to less than $25 per share. That leaves Constellation looking at a sizable loss on its investment for the time being. Constellation, for its part, has said that it is not happy with how Canopy’s business is going. Further, they seemingly forced the management change at Canopy earlier this year.
On the way up, Cronos followed Canopy’s example. Altria invested in Cronos Group stock at $12 per share. CRON stock shot up to as high as $25 following Altria’s investment. That led to a clean double, on paper, for Altria and the traders that followed along.
Until recently, CRON stock had faithfully held above the $12 level. It has seemed that Altria’s investment price served as a technical floor for shares.
However, that floor is in grave danger. CRON stock tumbled to $11.40 on Friday amid the market rout. With support gone, it could plunge.
Verdict on CRON Stock
I’ve said it before, and it’s still true: Cronos is arguably the best-positioned pot player for the long haul. The company has the combination of a great balance sheet and a patient smart owner in the form of Altria that is pursuing sustainable growth rather than trying to get big as fast as possible.
As we saw with Canopy’s operating results, record harvests aren’t very useful if there aren’t enough consumers to absorb all that excess supply. Disciplined growth is the right strategy now.
Regardless, while I like Crono’s approach compared to rivals, it’s hard to get excited until the industry consolidates more. You simply have too many growers chasing too small of a market. People need to calm down, relax, and let consumption catch up to the supply that is already in place.
In a rational market with balanced supply and demand, Cronos would likely be a big winner. But as long as the industry remains a highly competitive free-for-all with cutthroat pricing, Cronos Group stock will suffer along with its peers.
I don’t see CRON stock utterly imploding like Tilray has. But it’s hard to get excited about buying just yet. That $12 support level — where Altria bought in — was key.
If Cronos can’t recover it soon, look for Cronos, like Canopy, to take a substantial haircut below Altria’s buy-in price. If CRON stock follows Canopy in dropping 25% below its strategic buyer’s cost basis, CRON stock will fall to $9 per share in the coming months.
At the time of this writing, Ian Bezek owned MO stock. You can reach him on Twitter at @irbezek.
