Cannabis stocks have been battered in the past few months on slowing growth estimates and vaping health concerns. And Cronos Group (NASDAQ:CRON) is no exception, down 53.9% in the past six months.
Cannabis stocks have also gotten a handful of Wall Street downgrades in recent weeks. One of the biggest downgrades came from Bank of America analyst Christopher Carey, who cut his “buy” rating for cannabis leader Canopy Growth (NYSE:CGC). Fortunately for CRON stock investors, Carey remains extremely bullish on CRON stock. In fact, Carey recently reiterated his “buy” rating and $16 price target for Cronos Group stock.
In fact, there are at least four reasons to be buying CRON stock on the recent vaping-related weakness.
1. Show Me the Money
One of the biggest drags on cannabis stocks in the past few months is concern about dilution. After the initial investor enthusiasm over U.S.-listed cannabis stocks died down, reality set in about just how expensive scaling up these businesses will be. In fact, Carey is bearish on market leader Aurora Cannabis (NYSE:ACB) because he says the company will need to aggressively raise capital in the near-term.
On the other hand, Carey says Cronos’ $1.73 billion in cash represents 53% of the company’s intrinsic value. In fact, Carey says Cronos’ cash balance makes the company’s long-term growth strategy potentially the most viable among all cannabis companies. Investors who love cash should also look at Canopy as well. However, Carey says there is far more risk to Canopy’s consensus estimates than Cronos estimates.
2. CRON Stock Has Less Canadian Exposure
Following nationwide recreational cannabis legalization last year, Canada has been a major disappointment in 2019. Bottlenecks and other growing pains have stifled growth. Carey is now calling for third- and fourth-quarter Canadian cannabis sales to flatten before rebounding in 2020.
Despite strong growth in Candian cannabis retail sales, overbuying has created inventory build in recent months. Slow retail store expansion and a cap on how much stores can buy in Ontario has exacerbated the issue, Carey says.
Fortunately for CRON stock investors, Cronos has relatively high exposure to the U.S. CBD market compared to many of its Canadian peers.
“[D]espite [being] domiciled in Canada, it could generate more sales in the US in 2020, per CEO Gorenstein on Q219 earnings,” Carey says.
While the Canadian cannabis market rebalances, Cronos should be able to lean on its U.S. CBD business to a greater degree than other cannabis stocks.
3. Vaping Is Not Dead
Cannabis stocks have been pounded following unforeseen headlines about vaping and respiratory problems. In addition, at least one study has linked vaping to lung cancer in mice.
At this point, Carey says many of the problems with vaping are likely solvable in the long-term.
“While we acknowledge headline risk, we also think the vape category has strong long-term viability, once contaminants causing illnesses (largely in illicit, untested products) are identified and better oversight/regulation is enforced,” he says.
A recent study published in October by the Mayo Clinic suggests the cause of many of the vaping illnesses in humans is contaminants, not the cannabis oil itself. In addition, the National Institute of Health study linking vaping to cancer in mice was a nicotine study, not a cannabis study.
4. U.S. Funding On the Way
The fourth reason to love Cronos Group stock is the recent passage of the SAFE Act in the U.S. House of Representatives. I’ve previously written that a federal ban on cannabis in the U.S. restricts access to funding from U.S. banks, even in states where cannabis has been legalized.
However, the SAFE Act shields financial institutions from Federal intervention if they provide funding for cannabis businesses operating legally at a state level.
It’s particularly encouraging that the SAFE Act had 25 Republican co-sponsors in the House. However, MKM Partners analyst Bill Kirk says the Senate remains the big hurdle. Senate Majority Leader Mitch McConnell has been vocally opposed to cannabis legalization in the past. However, nationwide polling suggests nearly two-thirds of voters favor lifting the federal ban.
“This bill, if ultimately passed, would be good for the U.S. cannabis industry, helping provide capital and support services to an industry in need of it and setting federal pro-cannabis momentum,” Kirk says.
Access to U.S. funding would be good news for all cannabis stocks. It would certainly help CRON stock as the company continues to expand its U.S. footprint.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
