CRON Stock: An Unloved Pioneer
Investors and analysts were elated when Canopy Growth Corp (NYSE:CGC) listed on the New York Stock Exchange (NYSE). They even rewarded CGC stock with a healthy premium. Yet Cronos Group Inc (NASDAQ:CRON), which listed on the Nasdaq months before, is down 23% since it started trading. What is going on?
Some might suggest the correction is justified. After all, CRON stock trades at triple-digit multiples relative to its sales and earnings, so it’s not exactly a profit center. But that could be said about nearly every marijuana stock in existence. I don’t think it’s the full story.
Regardless, it’s possible that the slump in the CRON stock price can be viewed as an opportunity.
The 50-day moving average is currently higher than the 200-moving average. That’s one reason for optimism. But more importantly, Cronos is poised to have a large footprint in Canadian and international markets, meaning it could experience tremendous growth in the next five years.
Chart courtesy of StockCharts.com
The underlying business isn’t doing too badly either. If you look at first-quarter earnings, Cronos generated $2.9 million in revenue, up nearly 473% from the same quarter last year. (Source: “Cronos Group Inc. Announces First Quarter 2018 Results,” Cision, May 15, 2018.)
Add that to the partnership with MedMen Enterprises LLC (OTCMKTS:MMNFF, CSE:MMEN) and it’s hard to see any downside in Cronos. The company is just as competitive as Canopy Growth or Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB).
Global Reach Sets Cronos Apart
The investment appeal of Cronos is simple: international reach. The company has production facilities on three separate continents. Four are located in Canada, one in Germany, one in Poland, one in Israel, and one in Australia.
The Canadian operations are scaling to meet recreational marijuana demand. Selling pot will become legal in Canada in October, although in at least one province (Ontario), it will roll out in stages—i.e. first through online sales and then through private brick-and-mortar dispensaries.
Given that MedMen is the so-called Apple Store of pot, it could be extremely useful once brick-and-mortar stores come into play. I can’t vouch for that description myself, having never been there, but strong grassroots support in California shows it might be true.
Over in Germany, Cronos is providing medical marijuana through G. Pohl-Boskamp GmbH & Co. KG, a 183-year-old pharmaceutical company connected to 12,000 local pharmacies. The upside is massive. Not only is Germany facing a shortfall in its cannabis supply, but the medical doses dispensed by doctors and pharmacists are covered by health insurance plans.
Poland is even more exciting. Cronos signed a distribution partnership with Delfarma Sp. Zo.o, a privately owned pharmaceutical wholesaler that commands 40% of Poland’s domestic market. Its network comprises 5,000 pharmacies and 200 hospitals.
If you’re wondering why Cronos would leave the rest of Europe untouched, the answer is it didn’t.
From Israel, the company can export to 35 countries in Europe and Asia. The Mediterranean climate also reduces expenses. Cannabis pro at the Israeli kibbutz only cost $0.40 to $0.50 per gram, which is roughly half the cost of production in North America.
Cronos is expanding the acreage in this wholly owned subsidiary. Phase 1 includes a 45,000-square-foot greenhouse capable of producing 5,000 kilograms annually. Phase 2 would increase capacity to 24,000 kilograms per year.
Last, but certainly not least is Australia. Cronos has established a wholly owned subsidiary in the Outback.
Why? I have two plausible answers:
- Australia is extremely similar to Canada. Both are former British colonies, and they are alike in terms of size, demographics, politics, and economic construction. If Canada is ready for marijuana legalization, Australia cannot be far behind.
- Australia is a springboard to Southeast Asia. There’s no place in the world modernizing faster than Southeast Asia. Cronos can leverage this trend as it relates to illicit substances, chiefly by declassifying marijuana products as “illicit” substances and exporting them from its 120-acre campus outside Melbourne.
Note: Do not expect these international divisions to become profitable overnight. They will not. Nonetheless, it is notable that Cronos, a marijuana stock with unparalleled global reach, is down 22% over the last six months.
Caution is the best policy. There’s no denying that Cronos’s price-to-sales and price-to-earnings figures are well above industry standards. But then again, so is the company’s potential. So you have to decide what your risk tolerance can handle.
I personally think CRON stock is a compelling investment. The share price lost more than one-fifth of its value recently, putting it on the verge of penny-stock territory. If the price continues to fall, particularly beyond the $5.00 level, it might be worth opening one’s checkbook.