Cronos Group (NASDAQ:CRON) and its peers have received a reprieve. A U.S. House committee passed a bill that could eventually bring legal status to marijuana, but that’s not necessarily a reason to run out and buy Cronos stock.
Despite this promise, the bill must clear other votes and get a signature from the president. In the meantime, Cronos Group stock still maintains a high valuation.
Moreover, oversupply continues to hamper revenue and earnings growth. These conditions still make CRON stock a sell until a path to profitability appears.
Cronos lost more than 75% of its value between early March and the middle of November. However, in recent days, it has rallied from the low of $6.04 per share to a CRON stock price of about $7.75 per share as of the time of this writing.
Cronos’s peers have seen similar rallies. The rally in this Canadian marijuana company is likely due to welcome news from south of the border. The U.S. House Judiciary approved a marijuana reform bill by a vote of 24-10.
A Closer Look at Cronos
This bill would remove marijuana from the DEA’s Schedule I list of drugs. That would effectively make cannabis federally legal, leaving individual states to decide their own cannabis laws.
Still, this is only one step. The bill must get approval by the full House, the Senate, then finally a signature from President Trump. Nor is it yet clear how much it will boost CRON stock or its peers. During this time, CRON has not yet rallied past its 10-day moving average (MA), let alone the 50-day or 200-day MA.
Moreover, despite the massive drop, it still trades at more than 90 times sales. The latest quarterly revenue figure of CAD$12.7 million ($9.54 million) represented a year-over-year increase of 237.8%.
For the year, the projected revenue of CAD$36.55 million ($27.46 million) does not seem to justify the current market cap of $2.36 billion. CRON stock can still rise under such circumstances, but despite a considerable decline, fundamentals cannot offer CRON any help.
Canadian Regulations Remain an Obstacle
Nor will it receive help from Canada’s marijuana market. Due to an oversupply, prices of dried cannabis continue to fall. Moreover, as our own Tezcan Gecgil points out, Cronos and peers such as Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and Tilray (NASDAQ:TLRY) must compete with the lower prices offered on the black market. Also, like InvestorPlace contributor Josh Enomoto states, ineptitude by the Canadian government at least contributed to an oversupply in weed.
Like Enomoto and other colleagues, I believe the partnership with Altria (NYSE:MO) will eventually take CRON stock higher. However, as Luke Lango says, it must first find its way to profitability. I do not see it falling to $0 per share, but the fundamentals and the charts indicate that it can fall much further.
Investors need to also remember that Cronos produces an agricultural commodity, one comparable to tobacco, cotton, or wheat. The only difference is that 80 years of prohibition and its psychoactive nature made it a sort of forbidden fruit.
Once weed becomes commonplace, investors and the public will take it for granted. This will take CRON stock and its peers to valuations more in line with the S&P 500.
When it reaches that point and begins paying dividends, it will become a rarely-discussed profit generator. Assuming Altria does not buy it out outright, I believe it will become the Altria the cannabis. It will then bring investor gains and dividends to a diverse group of stock investors.
Final Thoughts on Cronos Stock
The marijuana vote in the U.S. House will probably not help CRON stock for very long. Yes, Cronos and other Canadian marijuana companies need U.S. legalization to fuel expansion. In that sense, any hint that Schedule I restrictions will disappear may help boost Cronos stock for now.
However, despite the massive drop in cannabis stocks, the bubble has not completely popped as valuations remain high. Moreover, legal marijuana companies must also compete with a black market that does not have to pay taxes or deal with onerous government regulations.
The Altria investment will help CRON stock stay afloat. However, until it embraces its future as a firm that produces a mundane, profit-generating, commodity Cronos stock will not become a long-term growth story.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
