Avoid Cronos Group Stock Even After Yesterday’s Cannabis Carnage

Vaping woes can translate into regulatory headwinds and slower recreational cannabis growth

Cronos Group (NASDAQ:CRON) stock is no exception when it comes to the pain that has been inflicted on cannabis stock investors since March. In the last six months, CRON stock has slumped by 64% even as the company’s revenue growth remains stellar.

Avoid Cronos Group Stock Even After Yesterday's Cannabis Carnage
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That was before yesterday’s bleak outlook from Hexo (NYSE:HEXO), which sent the entire pot stock sector lower, including Cronos stock which was relatively unscathed, losing 7.95%.

It is likely that the downside is overdone in the near-term, but I don’t see any upside triggers.

On the contrary, I believe that there are concerns that can result in CRON stock remaining sideways. This coverage will discuss the reasons that will keep CRON depressed.

Before discussing company specific factors, I must admit that companies like Cronos Group, Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC) have been taking big strides in terms of R&D and global expansion.

However, as an industry, the valuations are adjusting on the downside as markets discount relatively slower growth. At the same time, the markets are discounting a potentially extended period of cash burn. My point being — A bearish view does not imply a weak business model. However, stocks are returning to realistic valuations, which is good.

Health Concerns Pressure Regulatory Environment

Lung injuries related to e-cigarettes and vaping have been in spotlight in the recent past. The Centers for Disease Control and Prevention (CDC) has reported 1,080 lung injury cases with 18 confirmed deaths.

The key point to note from CDC is that use of THC-containing products has played a role in the outbreak. Equally important is that the CDC recommends buying e-cigarettes or vaping products only from “formal sources.”

This hints at the fact that use of cannabis might be rampant through parallel markets. This has two implications for companies like CRON, Canopy Growth or Aurora:

  • The parallel or black market can impact growth for companies. Pricing differential might attract consumers towards the parallel market than mainstream product market. Data from CDC backs my view with the agency estimating 37.6 million illegal users of cannabis in the United States.
  • Health impacts due to purchase from “informal sources” hits the market for recreational cannabis. Consumers are likely to be more cautious on purchase of recreational cannabis products that include vaping or cannabis beverages.

These health issues and injuries make regulators cautious and global market growth will be slower than expected. Therefore, revenue growth is also likely to be relatively muted.

CRON has Strong Foundation for Growth

CRON is still at an early growth stage, but the company has a strong foundation and ample liquidity to expand. With the backing of Altria (NYSE:MO), the company can also sustain an extended period of cash burn, which is likely.

Cronos has been active on the acquisition front and I believe that the company will pursue inorganic growth for international expansion. As an example, Canopy Growth has established presence in Europe with the acquisition of C3.

From an R&D perspective, it’s still an early stage for CRON compared to Aurora Cannabis or Canopy Growth. Both these companies have been active on the front of clinical research and patents. I believe spending on R&D will accelerate for CRON in the coming quarters.

In the segment of recreational cannabis, CRON has established Cove and Spinach brands. While the former is a premium recreational brand, the latter is a mainstream recreational brand. This would help CRON cater to a wider consumer range.

Another long-term positive is the company’s joint venture approach, which has provided CRON with inroads in Israel, Australia and Latin America. Of course, these JVs are not immediate revenue drivers, but will help CRON in establishing global presence.

Final Thoughts on Cronos Group Stock

Cronos Group stock has been trending lower and I believe that the stock is approaching more realistic valuations. Still at an early growth stage, CRON has potential for growth, liquidity for acquisitions and a big addressable market.

However, amid growth opportunities, there are headwinds in the form of regulatory hurdles. In addition, clinical research will involve time and it’s unlikely that the growth rate in medicinal use of cannabis will be robust.

In short, CRON stock is worth keeping in the investment radar, but the stock is unlikely to trend higher anytime soon.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/avoid-cronos-group-stock-even-after-yesterdays-cannabis-carnage/.

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