If you’re a believer in the broader cannabis narrative, the third-quarter earnings season isn’t getting off to a great start. Long considered one of the most stable names in the “botanical” industry, Cronos Group (NASDAQ:CRON) released its Q3 results, to much anticipation and let’s face it, anxiety. Unfortunately, stakeholders of CRON stock were right to be apprehensive.
On surface level, the report wasn’t that terrible. Prior to the disclosure, analysts had projected a loss on earnings per share of 3 cents. Instead, Cronos Group mitigated the profitability picture with an EPS loss of 2 cents. Given that earlier this year, Wall Street was looking for bottom-line thinking, Q3 was theoretically a win for Cronos stock.
However, we must look at the numbers in context. When we do, we’ll realize that CRON’s revenue haul of $10.1 million against a consensus target of $10.45 million was a bit of a disaster for Cronos Group stock.
One of the main reasons why investors remained patient with CRON stock was the underlying company’s growth potential. Transitioning from an illegal substance to a fully legalized one in Cronos’ native Canada, cannabis offered massive upside possibilities. However, rolling this out was a different matter.
Turns out, the Canadian government is just as inept as our own government, if not more so. Health Canada, the country’s health-related governing agency, created application and licensing backlogs for prospective marijuana enterprises. Because of this administrative fiasco, weed supplies skyrocketed, depressing both pot prices and Cronos stock.
And it wasn’t just Cronos Group stock under fire. Rival Tilray (NASDAQ:TLRY) also released lackluster Q3 results due to rising expenses.
Is it time to abandon the sinking ship that is CRON stock?
CRON Stock to Shift Toward CBD Market
Although I haven’t consulted anyone, I’m almost certain that most of my InvestorPlace colleagues will say yes. Moreover, I wouldn’t blame any that do. From the get-go, names like Cronos stock were billed as speculative affairs.
Interestingly, though, Cronos Group stock “only” lost about 3% on earnings day. Granted, that’s a sizable loss. But relative to the legal marijuana industry, that’s nothing. For instance, Tilray shed less than 2% following its Q3 report.
So, why the muted bearish response against CRON stock? Primarily, I believe that most of the bad news is baked into the share price. While Health Canada’s administrative problems continue to dog Canadian cannabis outfits, they’re also well-known headwinds. Excessive punishment on old news is, well, excessive.
However, CRON stock does deserve some red ink because of indications that they’re giving up on Canada’s recreational market. But before you pounce on the sell button, this also represents an ironic opportunity for the company.
Earlier this year, Cronos made headlines when it bought U.S.-based cannabidiol (CBD) beauty brand Lord Jones. With the acquisition, Cronos has critical exposure to the U.S. CBD market. You’ll recall that the landmark 2018 farm bill legalized hemp-derived products at the federal level, including CBD.
This move appears incredibly prescient for Cronos stock. With the Canadian market facing administrative challenges, the viable path forward is in the U.S. And during my conversation with cbdMD (NYSEAMERICAN:YCBD) chairman and co-CEO Marty Sumichrast, he articulated that the CBD market – not the recreational arena – is where the true growth opportunities lie.
Furthermore, Sumichrast noted that the U.S. cannabis sector lacks a dominant CBD brand. As a YCBD shareholder, I think cbdMD, which is headquartered in North Carolina, has a distinctive advantage. But don’t overlook Cronos’ partnership with tobacco giant Altria (NYSE:MO).
Bumbling Canada Won’t Stay Inept Indefinitely
In my opinion, at least some of the bearishness toward Cronos stock assumes that Canada won’t get their stuff together. However, I look at these as growing pains. Sure, they’ve impacted the industry a lot longer than advocates have hoped. But even bureaucracies will eventually find their way out of a paper bag.
In addition, CRON stock has some brewing tailwinds that many folks have likely forgotten about. A few months back, the vaping crisis gripped the nation, producing sensationalist headlines everywhere. At the time, the issue imposed a dark cloud on Cronos because of its vaping ambitions.
Today, though, the growth trajectory in vaping-related illnesses and deaths have declined significantly.
That’s not to say that Cronos Group stock isn’t risky right now, because it is. But with so much of the bad news accounted for, I have trouble endorsing the bearish take. Instead, I believe fundamental factors along with technical resilience suggests that the contrarian approach has legs.
As of this writing, Josh Enomoto is long YCBD stock.
