Many cannabis stocks that have gone public in the past few years have made considerable sums of money for their initial investors. One of those early winners was  Cronos Group (NASDAQ:CRON) stock.

With a market cap of $3.07 billion, CRON stock is one of the largest Canadian marijuana names. In 2019, most marijuana stocks have been extremely volatile. And cannabis companies have lost significant value since October 2018. During the summer, marijuana stocks fell further.

Many marijuana stocks, including CRON stock, have come down to more attractive levels. Now that the last quarter of the year is upon us, let’s try to determine whether Cronos Group stock is worth buying.

CRON Stock’s Q2 Earnings Failed to Impress

On Aug. 8, Cronos Group released its second-quarter results . CRON reported C$10.24 million in net sales.

Although Cronos’ sales surged 202% YoY, its gross margin actually dropped ten percentage points YoY, from 63% to 53%. Furthermore, its operating expenses came in at C$26.29 million, representing about a 349% YoY increase. After the release of the results, Cronos Group stock initially went up, but as investors digested the metrics, CRON stock reversed and stayed lower.

Cronos’ Q1 results did not impress investors much, either.  CRON stock fell 7% in the wake of its Q1 earnings.

The Cannabis Market

More than 260 million adults worldwide consume cannabis at least once per year. Collectively they spend $344 billion annually, according to the cannabis research firm New Frontier Data.

Like its peers, Cronos has three key target markets: Canadian consumers (i.e., recreational users); Canadian medical; and international medical.

In general, of these three areas, Canadian recreational users are the most important target for the industry. Similarly, in the United States, only 20% of legal cannabis sales come from medical customers.

Over the past year, investors have noted that Cronos Group’s sales to the medical cannabis market are low. But its recent results show that its sales in the recreational market are not very strong, either. CRON’s shares  of Canada’s recreational market is about 2%.

In its quarterly results, Cronos Group regularly highlights its focus on technology, innovation, and global opportunities. But these markets probably won’t generate any substantial sales in the near-term. Wall Street’s primary focus is in on the near-term

Marijuana Stocks, Including CRON Stock, Are Facing Headwinds

There are a wide range of issues affecting the cannabis industry. Health Canada, the Canadian regulator, has — due to “unauthorized activities” — recently revoked both the producer and the dealer licenses of Canada-based cannabis producer Agrima Botanicals, which has been under creditor protection for several months.

And in July, the cannabis sales of another Canadian company, CannTrust Holdings (NYSE:CTST), were put on hold by Health Canada for unlicensed growing. In other words, for the first time since the legalization of marijuana in Canada, the issues of clarity, compliance and transparency have become prominent recently. For most cannabis companies, including Cronos Group, fully complying with the law means increased costs.

In late 2018, in the weeks following legalization, Canadians spent about $40 million on legal weed. However, since then, the sales of cannabis have been much less robust than most initially anticipated.

There may be too many players in Canada, a relatively small market. According to a 2018 graduate dissertation by Olivier Côté completed at the Norwegian School of Economics, “a survey conducted by the Canadian Government (c 2018) found that roughly 12% of the [Canadian] population consumes cannabis for recreational purposes.” About 28 million Canadian adults  can legally purchase cannabis products.

Annual Canadian sales are not likely to exceed $4 billion, partly because the black market is still thriving in Canada.

No one knows when (or if) the federal government  will legalize cannabis in the U.S. And outside of those two countries, sales of cannabis are not high enough to act as a substantial catalyst for  CRON stock and other cannabis stocks.

Could consolidation be a way forward for most of the cannabis producers like Cronos Group stock?

CRON Stock and Canadian “Legalization 2.0.”

In Canada, pot edibles and beverages will become legal on Oct 17, one year from the original legalization of cannabis in the country. Industry watchers are referring to this new era  as “Legalization 2.0.”

Around this time last year, Canadian marijuana stocks started rallying in anticipation of the legalization of pot smoking. Therefore, the hype surrounding the launch of cannabis drinks in Canada is likely to add a bit of fizz to CRON stock.

The new products are not expected to hit shelves  until Dec. 16, as license holders will have to give Health Canada 60 days notice of their intention to sell them.

Cronos Group recently said that it would have to increase its spending to roll out derivative products like vaping devices and edibles. Management is likely to tap into the funds it received from Altria Group’s (NYSE:MO) to finance its investments.

I think that the still-elevated valuation of marijuana stocks, including CRON stock, may continue take a hit in the coming months, especially after the hype of Legalization 2.0 ends.

Where CRON Stock Price Is Now

In general, marijuana companies started the year on a strong note. However, investors haven’t been very bullish on the industry in recent months. Especially since mid-March, many cannabis stocks, including CRON stock, have fallen from grace.

So far in 2019, Cronos Group stock is down about 12%. CRON stock and its peers can also be quite volatile. After starting 2019 around $10, on Feb. 4 CRON stock reached  an all-time high of $25.10.

The mixed Q1 and Q2 results have put further pressure on Cronos Group stock and other marijuana stocks. Currently CRON stock is hovering around $9.

The downtrend is a stark reminder that CRON’s all-time high of about $25 may not be tested again any time soon. Many investors are now wondering if the bears may possibly push the shares below $9.

Cronos Group stock’s technical charts look weak, pointing to the possibility of  more longer-term declines around the corner. Expect nearer-term trading to be choppy at best, possibly until the next earnings announcement, expected to occur in November.

If you’re still upbeat on CRON stock, you might consider waiting for the shares to drop to around $7.50. However, investors who buy CRON in the near-term should expect to hold the shares for several years.

Short Interest and CRON Stock

As part of short-term sentiment analysis, investors may also monitor the extent to which stocks are shorted.

If more than 20% of a stock’s float (available shares) are shorted, then even a small rise in its price could actually trigger a powerful short squeeze, propelling the stock much higher.

At this point, over 23% of CRON stock is shorted. And it would take about ten days for those shorting the shares to cover i.e. close out, their short positions. Therefore, Cronos Group stock may soon become a candidate for a short squeeze, especially if the industry in general is rallying.

However, I do not think any potential rally by CRON will last long. Cronos Group stock is likely to move between $7.5 and $10 in the coming weeks.

The Bottom Line on CRON Stock

Investors should remember a well-known rule involving stocks:  risk and return go together. Where there is a potential return, there is also a potential loss. So far, cannabis stocks have been largely driven by hype and publicity. I regard Cronos Group stock as a quite risky investment. Despite its relatively large market cap, CRON stock remains a small participant within the Canadian legal cannabis market. Shareholders should therefore be ready to endure a period of slow growth by CRON.

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