Back in September, I wrote that Cronos Group (NASDAQ:CRON) stood out in a field of cannabis companies that all look the same. The difference then, and now, is that Cronos is not trying to be the largest cannabis producer. But investors are looking at declining price-per-gram numbers and reduced production capacity and punishing CRON stock.
In the last month, Cronos Group stock is down 17.5%. For all of 2019, Cronos stock is down 41%. Most of the decline is due to an earnings report that cast a floodlight on the company’s lack of production capacity.
Cronos Group Is Not in the Production Business
If there’s one thing that you get from this article, this next statement is it. Cronos is not trying to be a large-scale grower that will compete with Canopy Growth (NYSE:CGC) or Aurora Cannabis (NYSE:ACB). I mention this because one of the critiques of Canopy’s last earnings report is their diminished production capacity.
Conventional wisdom says the companies with the largest production capacity will be the winners when cannabis becomes legal. That means companies like Canopy and Aurora Cannabis. But the market is oversupplied. And the market that will be the gamechanger, the U.S., faces an unclear path to legalization.
But that’s not the approach Cronos Group is taking. In fact, CRON’s management team has repeatedly said it prefers to hire contract farmers to meet demand rather than becoming a farmer itself.
Cronos Is Focusing on Research and Development
There are two strategic objectives that showcase how Cronos is different from other cannabis companies. First, it has partnered with Ginkgo Bioworks and purchased a facility to focus on producing minor cannabinoids such as tetrahydrocannabivarin (THCV) at commercial scales through a process called biofermentation.
CRON also has agreements in place with third-party suppliers who will use Cronos’ proprietary formulations in derivative products such as vaping pens, edibles, and topicals.
On their conference call, Cronos management also mentioned its plans to adopt U.S. accounting policies beginning with their fourth-quarter earnings report. This suggests that Cronos Group is making plans to become a U.S.-based company.
It’s not exactly like saying Cronos Group is playing chess while the rest of the industry plays checkers. However, the true potential of the cannabis market will only come when the U.S. market is open for business. And it certainly looks like Cronos is positioning itself for that reality.
But while I have stated on numerous occasions, I firmly believe that legalization in the U.S. is now a matter of when, not if. Still, investors need to invest in the reality of what is, not on what they hope the market will be.
Hope Is Not a Strategy in the Cannabis Sector
Investors are disillusioned by the cannabis sector. Patience can be a tough virtue for investors to exercise, particularly for a sector that still looks like a compelling long-term play. But patience is required if you are investing in cannabis stocks. And it may be required even more if you’re investing in Cronos stock.
At the beginning of the year, cannabis bulls were encouraged by the opening of the Canadian market for both recreational and medicinal cannabis and cannabis derivative products. But like most things about this sector, the flood gates have not opened as quickly as investors would like.
But is this delay a setback, or merely the cost of doing business? I’d say the latter. That doesn’t make it any easier if you’re an investor who is getting tired of waiting on profits. But that’s where this industry is right now.
CRON Stock Is a Trade, Not an Investment
It seems that traders are carefully looking at CRON stock to find levels of support and resistance. And I suppose there’s enough price movement that it may be a profitable stock to trade. But there’s a difference between trading and investing.
As an investment, I would follow the adage of “trust but verify.” Cronos Group has yet to deploy most of the $1.8 billion equity investment it received from Altria (NYSE:MO). And of the 13 analysts that have issued price targets for Cronos Group stock, the average 12-month price target is $18.18. That’s a whopping 173.50% gain.
But realizing that gain, if it happens at all, is likely to require a lot of patience. And only you know how much of that you have.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.