Shares of Cronos Group (NASDAQ:CRON) recently bounced from a low of $6.09 to $8.05. This after the House Judiciary Committee passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act with a vote of 24 to 10.
At the moment, it has 55 cosponsors, and is designed “to decriminalize and deschedule cannabis, to provide for reinvestment in certain persons adversely impacted by the War on Drugs, to provide for expungement of certain cannabis offenses, and for other purposes,” says Forbes contributor Mike Adams.
It could remove cannabis from the Schedule 1 of the Controlled Substances Act, require courts to wipe out cannabis convictions, and authorize a 5% federal tax.
While that all sounds exciting for cannabis investors, it won’t see the light of day for quite some time. For that to happen, it must first pass the full House and the U.S. Senate, where the bill may fail under Senate Majority Leader Mitch McConnell.
Unfortunately, that’s the only catalyst that has propped up CRON stock.
It’s not as if revenue-damaging oversupply issues are anything to get excited about. In short, I’d avoid CRON like the plague – at least in the near-term.
Cronos Group Stock Has Lost a Third of Its Value
Unlike prior years, 2019 became a year to forget for cannabis investors thanks in part to slower-than-expected growth in Canada. At the moment, supply is outpacing demand, as noted by Financial Post contributor Vanmala Subramaniam:
Canadian cannabis producers and extractors are sitting on a massive stash of unfinished inventory that is growing so quickly that some analysts are concerned it could precipitate a price crash in the burgeoning industry.
That’s not comforting at all. On top of that, the FDA isn’t helping much. As CRON makes its way into the CBD market in the U.S., the FDA crashed the party with a warning that CBD has the “potential to harm you” and could cause liver damage, and even affect other drugs.
CRON Earnings Weren’t Anything to Write Home About
Earnings fell short of quarterly revenue estimates, as it was weighed down by lower margins and higher expenses. It posted a wider-than-expected adjusted core loss of 23.9 million CAD, which is up from 3.2 million CAD year-over-year. However, revenue did rise from 3.2 million CAD a year earlier to 23.9 million CAD.
Analysts aren’t confident either.
“We continue to struggle with the profitability expectations for the industry,” MKM analyst Bill Kirk wrote. “In Cronos’ case, 3Q’19 generated C$2.5 million ($1.9 million) more than 2Q’19 in revenue, but EBITDA losses widened by C$6.2mn. With inventory levels too high at the provinces and absolute and relative pricing pressures, we don’t see a near-term industry catalyst for improved profitability.”
The Bottom Line With CRON Stock
At the moment, I’d stay away from CRON stock. With the MORE Act unlikely to pass Congress and supply issues still plaguing Canada, you can find better opportunities elsewhere. Until such issues are resolved, I’d avoid CRON.
As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.