Cronos Stock Is a Buy if You Can Handle the Wild Ride Ahead

For the first time in 2019, Cronos Group (NASDAQ:CRON) is trading below the $10 level. Even though selling pressure is easing, Cronos stock shows no sign of bottoming.

Cronos Stock Is a Buy if You Can Handle the Wild Ride Ahead
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With no bad news ahead, which includes its earnings report estimated to be on Nov. 7 before market open, the stock might start attracting speculators. But to attract cannabis investors, the sector needs an influx of positive news.

The U.S. House of Representatives legislation allowing bank involvement for cannabis stocks is a start.

On Sep. 25, the House voted to let federally-insured banks work with cannabis shops and companies, provided the State legalized marijuana. Banks conducting business with cannabis companies will not face any federal prosecution.

This benefits marijuana firms because it will help those that need access to financing to support operations. Cronos, in particular, is sure to benefit. Altria (NYSE:MO) has $4 billion invested in the company and has interests in Juul, too.

As Cronos gets distribution channels developed and invests in brand-building, it may need to access additional funds from banks.

Valuation Headwinds

Selling pressure for cannabis stocks may continue until these companies report higher revenue levels. On Aug. 8, Cronos reported second-quarter revenue of just CAD $10.2 million, up two-fold from last year. By comparison, Cronos stock has a market cap of $3.07 billion.

Kilograms of product sold more than doubled to 1,564. Cronos ended the quarter with CAD $1.58 billion in cash and cash equivalents. The company continued to transition its current production towards a global supply chain model.

This will require a more efficient combination of production facilities, third-party suppliers, and global production partnerships. It will also establish the methodologies and best practices at Peace Naturals.

Increasing Supply

To align its production with the derivative market launching this fall period, Cronos established a supply agreement with MediPharm Labs (OTCMKTS:MEDIF). MediPharm will supply around CAD $30 million of cannabis concentrate over 18 months.

It has the option to expand the orders to CAD $60 million over 24 months. In July, Cronos established a supply agreement with Heritage Cannabis Holdings.

Heritage will provide cannabis for vaporizer devices for the Canadian market, including filling and packaging. This deal is worth CAD $35 million. Unfortunately, the ban on Juul’s vaping products adds uncertainty to Cronos. Governments may also ban vaping for cannabis products, cutting off a vital market for Cronos and for the cannabis industry.

With Cronos stock trading recently at $9.14, the may soon trade at 1-year lows. Fears over the dangers of vaping calls to ban e-cig could send CRON stock to the $5 range.

These are lows not seen since 2018. If the U.S. FDA tightens rules against vaping, it may cut off the vital research on vaping, hurting Cronos’ future prospects in the space. Cronos already has a multi-year contracting for vaporizer devices with MediPharm Labs.

Analysts Still Bullish on Cronos Stock

Based on six analysts covering CRON stock, the average price target is $15.71 (per Tipranks). The price target ranges from $12.08 to $18.87.

When Cronos reports quarterly earnings in two months, another slow revenue growth number may pressure its shares. Still, investors who have a longer-term investment horizon will not expect profit growth accelerating in the short-term. Cronos needs to build out its facilities and expand production to meet global demand. This does not happen overnight.

Investors who believe fundamentals for Cronos are the same should look for an entry point. The stock may continue heading lower as worries for the sector mount. Only companies with a viable business plan and a strong balance sheet filled with cash will survive in the long-run. Cronos is one of such companies.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/why-cronos-stock-in-for-a-wild-ride-ahead/.

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