If you follow the cannabis industry, you probably know that there is a bloodbath occurring. Cronos (NASDAQ:CRON) has not escaped this but it has held up better than other companies. Cronos stock has fallen by almost 33% in the past year.
Although this seems bad at first glance, it is not nearly as bad as the performance of the stocks of some of the other cannabis growers.
Over the past 52 weeks, Canopy Growth (NYSE:CGC) has dropped by 65%. Aurora Cannabis (NYSE:ACB) has dropped by almost 70%. Even worse, Tilray (NASDAQ:TLRY), the first cannabis company to list on the NASDAQ that everyone seemed so bullish on when it went public last July, has lost almost 90% of its value.
This is probably because Cronos stock is different from these others. Unlike Tilray and Canopy, Cronos actually has turned a profit while the other two have not. In 2018 it reported a net income of $2.5 million.
It lost money last year but it was ‘only’ about $20 million. Tilray lost $7.8 million in 2017 and $68 million in 2018. Meanwhile, Canopy lost $51 million in 2018 and $647 million in fiscal 2018, which ended in June.
As for Aurora, the company has an enormous amount of Goodwill in its valuation while Cronos stock has almost none. Goodwill is a measure of intangible assets any many analysts have argued that at 70%, Aurora’s is exceedingly high.
The Action in Cronos Stock Was Telling
Professional traders are not surprised that this selloff has occurred. This is because, despite two recent events that should be very bullish for the cannabis industry, many stocks traded lower as if this news never happened.
This is what traders call bad action. In other words, if news comes out on a company that should be bullish for the stock and it sells off, that is bad action.
Conversely, if news is released that should be bad for a stock and it goes higher, that would be considered good action. Understanding this concept can help you evaluate investments. This is because the market is always right, while the commentators in the financial media that are trying to explain it are almost always wrong.
Good News for Cronos Stock
On Aug. 26 the Department of Justice announced that it is taking steps to facilitate and expand research on cannabis.
For the past 50 years, the only institution in the United States that was legally allowed to grow cannabis for research purposes has been the University of Mississippi. Now the DOJ has been processing applications for other institutions to be able to do so. This is extremely bullish news for the industry.
In addition to this, there was also news that the House of Representatives voted overwhelmingly to pass the SAFE Banking Act. This move is meant to give cannabis companies access to traditional banking and financial services. As of now, most banks will not service cannabis companies due to questions of legality.
This is a step towards changing that. It still needs to pass the Senate which some think will be more difficult to do, but this is still a very bullish development.
Despite these two very positive developments for the industry, when they were announced the stocks continued to trend lower. There is a classic example of bad action being a signal that the selloff will continue.
Unfortunately for CRON there is a chance that it could go significantly lower from here. I do not see any obvious support until levels down around $5.50. Support at a level is when there is enough demand for the stock that the sellers can sell as much as they need to without adversely affecting the price. When stocks are dropping and they get to these levels they stop going down.
From February through August of 2018, there was support around the $5.50 level. If CRON stock does get to that level it would be a decline of about 30%.
At the time of this writing, Mark Putrino did not have any positions in the aforementioned securities.