The marijuana market has been under a lot of pressure lately as supply issues in Canada, coupled with worries about future regulations, have hurt investors’ confidence in the industry. However, there’s no denying that pot is gaining mainstream traction and for that reason, most are expecting to see explosive growth in the cannabis market over the next decade.
That means there are certainly opportunities to be had if you’re willing to pick up a beaten-down pot stock.
Cronos (NASDAQ:CRON) has been one such victim of the recent pullback in the pot industry. CRON stock has lost more than half of its value in just six months, which is enough reason for me to take a closer look. Could Cronos Group stock be a value play?
Although the firm has long-term potential, and its share price has come down significantly, I don’t think it’s time to buy just yet.
Supply Issues in Canada
Like the majority of its peers, Toronto-based Cronos is suffering from supply issues in its home country. Canada decided to legalize cannabis in October of last year, but since that time, the government has been inundated with licensing requests. Unfortunately, that means the wait time for anyone wishing to operate legally in Canada’s marijuana market is outrageous. Aphria (NYSE:APHA), for example, has been waiting for more than a year for a cultivation license.
That’s put pressure on supply, and in turn opened the door for black-market dealers who want a slice of the ever-growing marijuana market. When will things level out? It’s impossible to predict, but I wouldn’t expect it anytime soon. Legalizing marijuana is a huge undertaking, and with all of the regulations and political issues that go alongside such a large operation, the process is going to be slow moving and inefficient.
Of course, regulations and supply issues are affecting the industry as a whole, not just CRON stock. However it’s worth keeping in mind that an industry-wide turnaround is unlikely in the near future, so there’s no reason to rush out and buy.
Operations Look Shaky
If you’re in it for the long run and you want to start building up a pot position slowly, you might consider starting to add some cannabis stocks now despite the ongoing legalization issues. However, Cronos stock shouldn’t make your short list. The firm has some problems that will likely keep it from going anywhere — at least until next year.
The firm’s second-quarter results painted a worrying picture of its operational prowess. Although Cronos Group stock was able to deliver per-share profit to its investors over the past two quarters, the good news ends there. For one thing, those profits came solely from one-time benefits. CRON isn’t profitable at this point — it’s not even close.
For that reason, it simply doesn’t deserve the premium it’s been trading at. As InvestorPlace’s Thomas Niel wrote last week, even after it’s 50% decline, CRON stock is still trading at a premium to its peers. Without profits, or a clear path to future profits, it’s hard to justify that kind of valuation.
Finally there’s the issue of the 380 lung illnesses that the Centers for Disease Control and Prevention has tied to vaping. Most patients have reported vaping either a THC or nicotine product. Some of my colleagues say the lung health issues are creating a contrarian play. Perhaps that’s true, but with all that’s going on in the marijuana space right now, adding CRON stock — whose future rests heavily on vaping — is far too risky.
As InvestorPlace’s Will Ashworth pointed out, CRON’s ties to Altria (NYSE:MO) should give it a lifeline as the vaping crisis plays out. After all, Altria has been through it all before with cigarettes. The CDC says 480,000 Americans die from smoking-related illnesses each year. Yet, cigarettes are still on the market.
The issue with that view is that cigarettes were a mainstream part of life before such statistics were released. Vaping and THC-laced e-cigarettes are a relatively new development. In fact, they aren’t even legal across the U.S. yet. Banning e-cigarettes now, although a challenge, could be something many states (and countries) decide to take on if the health issues persist.
The Bottom Line on CRON Stock
CRON stock doesn’t appear to be heading to zero anytime soon, but the firm also looks like it should be the last choice for value investors.
Not only does the company have some strong headwinds to deal with, but its valuation is still too high to make it a good “buy the dip” choice.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.