There has been a comeback by marijuana stocks, but investors have been skeptical of the rally — and rightfully so. It’s hard to trust names like Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC) as they’ve been under incredible pressure. Who’s to say we’re not just seeing a dead cat bounce by CGC and CRON stock?
Many times, the difference between a true reversal and a dead cat bounce is only obvious in hindsight. However, investors who believe in the long-term potential of these businesses may consider it too hard to pass up these stocks when they are down 60%-plus from their highs.
Is CRON a good stock to buy? Let’s take a look.
Evaluating Cronos Group Stock
I’ve said it before and I’ll say it again: Cannabis stocks are very hard to evaluate. They command huge valuations relative to their current sales, and they are generally unprofitable and cash flow negative. Those are not the types of investments that most people seek out.
However, investors do look for companies with plenty of opportunity, which pot stocks happen to have.
CRON had a 237% year-over-year revenue gain in its most recent reported quarter. But here’s where things get tough. The company had revenue of just 12.7 million CAD last quarter. In the first three quarters of its current fiscal year, CRON stock had just 29.4 million CAD of sales. Nonetheless, Cronos stock has a market cap of $2.4 billion.
Marijuana stocks have extremely high valuations for two reasons: The large investments some cannabis companies have received from corporations and their large potential market. Unfortunately, the latter hasn’t panned out quite as well as many had hoped.
I think investors would shrug off the valuation concerns if marijuana stocks could live up to the growth hype. CRON stock is a great example, as it’s missed average revenue expectations in five of the last six quarters. Even though its growth is strong, it’s not growing as rapidly investors had hoped for.
Thankfully, Cronos Group has a decent balance sheet.
The company has total cash of $1.99 billion. While that’s down from $2.4 billion just two quarters ago — and that is a little concerning — it still has plenty in the bank.
Cronos’ current liabilities of $614 million is roughly 29% the size of its current assets, which stand at $2.08 billion. Its total assets of $2.76 billion also easily outweigh its total liabilities of $615 million. The biggest issue for Cronos stock is cash burn. If CRON was reporting break-even cash flow, it would be a lot easier to bet on its business.
Trading CRON Stock
Sometimes a picture — or in the case, a chart — says 1,000 words. One glance at CRON stock over the last three quarters tells investors everything they need to know about what’s been going on. To add insult to injury in the case of cannabis stocks, the overall market has been making new high after new high.
So what will happen going forward?
As the headline of my column states, CRON stock has been capped by downtrend resistance (depicted by the blue line on the chart above). Cronos stock has been below the 50-day moving average for the last five to six months. In order for bulls to garner any type of upside momentum, this pattern must stop.
That is, CRON stock has to get above its downtrend resistance and the 50-day moving average. On the plus side, the stock’s early December pullback did not result in a new low.
Cronos Group stock has a 52-week low of $6.04. If CRON stock breaks below that, bulls’ backs would be broken. I would love to see the stock continue to make higher lows going forward,and to take out its downtrend resistance and the 50-day moving average. If it can do so, the $8 level should be watched. Above that, and the shares may really start to garner some momentum.
Keep in mind that end-of-the-year selling spurred by the desire to take losses for tax purposes may keep pressure on marijuana stocks. But if CRON stock can avoid making new lows in 2019, it may have an opportunity to rally in 2020.