Although it is one of the most exciting sectors in the markets today, marijuana just can’t catch a break. That sentiment extends to major players like Cronos Group (NASDAQ:CRON). Since March of this year, CRON stock has been fighting against a decidedly bearish trend channel. Seemingly with no bullish narrative on the horizon, weed investors just keep losing.
But what is driving the losses toward Cronos Group stock and its peers? No matter how you look at it, CRON has suffered from poor timing as bad news wracked the sector. Last month, Canadian cannabis firm CannTrust (NYSE:CTST) admitted that it had grown cannabis illegally in its facilities. The admission came after a Health Canada investigation.
Even worse, the unlawful operation involved incredibly coordinated efforts. For instance, a CannTrust whistleblower reported that the company used fake walls to conceal the illegally grown cannabis. Initially, such tactics fooled Health Canada into believing everything was on the up and up.
But what do CannTrust’s controversies have to do with CRON stock? The answer is both nothing and everything. At first glance, it seems almost unfair for the markets to penalize Cronos Group stock. Both people and corporations should be judged on their actions, not on their perception of such.
However, as we all know, marijuana is a narrative-driven market. And when a New York Stock Exchange weed ticker sparks a scandal on this magnitude, it’s impossible the downfall won’t impact CRON stock.
Adding to the woes is that Cronos, like other marijuana companies, produced half-baked performances in the recent earnings season. Combining the available evidence, Cronos Group stock simply looks like a loser.
Narrative Angle a Double-Edged Sword for CRON Stock
While I truly believe that legal marijuana offers a paradigm-shifting opportunity for investors, it has unique vulnerabilities. As I mentioned above, this sector is narrative-driven. Bad news, even unrelated to your target equity, can impose a severe impact.
Under this context, the second-quarter earnings report for CRON stock didn’t help. Although the company produced impressive headline numbers, accounting for non-recurring benefits, it was a rather disappointing showing. When you consider that market observers were hoping that at least one of the cannabis players would drive home a fundamentally substantive report, it’s understandable why the sector sank.
Although it’s easy to get down on Cronos Group stock because it’s so sensitive to news items, we should remember this point: a strong narrative should likewise deliver robust results in the markets.
Right now, I believe Wall Street is downplaying the potential of Cronos’ recent acquisition of Redwood Holdings. An American hemp and cannabidiol (CBD) company specializing in beauty products, Redwood gives CRON stock a firmer foothold in the U.S. cannabis market.
Also, it allows Cronos to expand Redwood’s footprint while everyone waits for the U.S. to emerge from the Stone Age. As you likely know, marijuana remains a Schedule I drug. Therefore, we have a clash between federal regulations and individual state laws.
However, hemp-derived CBD is federally legal. That’s because the 2018 farm bill changed the federal definition of hemp. Thus, Cronos via its Redwood acquisition has a viable pathway to American CBD consumers.
That is a very big deal. According to a recent cannabis research paper, CBD sales in the U.S. could surpass $20 billion by 2024. With such an opportunity, you can see why Altria Group (NYSE:MO) invested nearly $2 billion into CRON stock.
American CBD Will Save Cronos Group Stock
Of course, I completely understand why many people are hesitant to approach CRON stock. Most of my bullish arguments revolve around legal marijuana’s potential. But in the here and now, this sector is largely a disappointment.
But that’s the beauty of weed, isn’t it? If we were trading on known factors, this market wouldn’t be so volatile. And if we truly knew with reasonable confidence this sector’s upper boundaries, very few would invest. Simply put, the financials don’t justify the risk.
However, those upper boundaries are technically unknowns. That said, I believe that the probabilities support further integration of CBD into the U.S. market, not less. For instance, public support has reversed to the positive for marijuana legalization. Also, some studies indicate that CBD consumers are older, more educated, and are typically gainfully employed.
With CRON stock and similar investments, we ultimately have two choices: We can look at the current state of affairs, which admittedly is unfavorable. Or, we can gamble that the U.S. market will continue to open doors, both legally and commercially. But there’s a big gap between those two arguments, which explains this sector’s volatility.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
