October 17, 2018: the date on which recreational marijuana use will become legal in Canada, is close at hand. With it come high hopes that marijuana stocks will finally be able to capitalize on what they’ve been promising investors for years.
In particular, Cronos Group Inc (NASDAQ:CRON) could become the biggest winner in the overcrowded weed sector.
Recently, the company reported triple-digit revenue growth in the second quarter, a landmark partnership with Ginkgo Bioworks, new ventures furthering its global expansion, major supply agreements, and significant steps to be one of the world’s leading providers of cannabidiol (CBD) oils.
On the technical side, the company’s share price remains bullish, with strong indicators for major gains. This has resulted in an aggressive CRON stock forecast that could see the stock’s price cross $22.00 per share by the end of the year.
Cronos Stock Forecast
More than anything, the hype surrounding what marijuana stocks could do has helped propel weed stocks higher. With the legalization of recreational marijuana about to come into effect in Canada, it’s up to weed companies to actually perform.
Because recreational marijuana use is not legal in the United States, many American investors have stayed away from pot stocks.
The vast majority of marijuana stocks trade on the Toronto Stock Exchange (TSE) or on Canadian junior stock exchanges (i.e. TSX Venture or Canadian Securities Exchange) and U.S. over-the-counter (OTC) exchanges.
That said, CRON stock is one of just a few big marijuana stocks that also trades in the United States. That might explain why its share price has been soaring since early August, with a U.S. market cap exceeding $2.0 billion.
One could argue that investors have been sending the share price of Cronos, Canopy Growth Corp (NYSE:CGC), and Tilray Inc (NASDAQ:TLRY) significantly higher because they trade in the U.S.
There are, after all, many excellent marijuana stocks that trade exclusively in Canada. And because American investors are somewhat hesitant to invest outside the country, these marijuana stocks are overlooked for now.
This is going to play an even larger role as Canadian marijuana legalization comes into effect.
CRON stock is uniquely situated to benefit from the onrush of American investors interested in gaining exposure to the Canadian market.
Cronos is the only marijuana stock on the Nasdaq besides Tilray, and the latter has already had a massive surge upward, with little room left to grow. Cronos stock, meanwhile, still has a lot of potential, and is therefore an intriguing option for U.S. investors.
At the same time, Cronos has recently made a number of major announcements that suggest it deserves the attention it is getting.
On September 4, Cronos announced a landmark deal with Ginkgo Bioworks Inc. to produce cultured cannabinoids. Then, on August 29, the company announced that it had formed a 50/50 joint venture in Columbia with an affiliate of Agroidea SAS, Colombia’s leading agricultural services provider, named NatuEra S.à r.l.
Cronos Group already has multiple international production and distribution platforms in Germany, Poland, Israel, and Australia.
On August 21, Cronos announced its first agreements for retail distribution of marijuana in Canada. The company secured listings and signed bindings supply agreements with the Ontario Cannabis Retail Corporation and the BC Liquor Distribution Branch.
Ontario and British Columbia account for more than 50% of the Canadian population and are also two provinces known for their love of marijuana.
Not surprisingly, the Cronos Group Inc stock price has been on a tear.
Chart courtesy of StockCharts.com
CRON stock has broken above a major resistance level. The company’s share price is mirroring a similar pattern from July 2017, when it soared from around $2.00 per share to around $12.00 per share. That’s an increase of 500%.
Moreover, Cronos is trading above its 50-day and 200-day moving averages, showing a continued upward trend. There has also been a serious spike in trading volume since the middle of August, pointing to excited buying.
Furthermore, momentum indicators like the moving average convergence/divergence (MACD) and the relative strength indicator suggest ongoing bullish sentiment.
It’s highly unlikely that Cronos Group’s share price will soar more than 500% over the coming months, implying a price in excess of $72.00 per share.
Hopefully rational investors will prevail. That said, all of these technical indicators suggest that the Cronos Group Inc stock price could more than double by the end of the year, to around $22.00 per share.
After that, it’s up to Cronos and other major marijuana companies to post solid fourth-quarter results in early 2019.
On August 14, Cronos announced its financial results for the 2018 second quarter ended June 30. Second-quarter revenue came in at $3.4 million, a 428% increase over the $600,000 recorded in the same prior-year period. (Source: “Cronos Group Inc. Announces Second Quarter 2018 Results,” Cronos Group Inc., August 14, 2018.)
The triple-digit increase was helped by an expansion in patient onboarding, an increase in the average sales price, and strong growth with the company’s CBD oil products.
Second-quarter net income was $723,000, up significantly (315%) from $174,000 in the same quarter last year.
“This year and subsequently, this quarter is about setting the stage and establishing Cronos Group’s strategy for future growth,” said Mike Gorenstein, CEO of Cronos. (Source: Ibid.)
At the end of the second quarter, the company reported finished goods inventory and biological assets of 2,451 kilograms (5,403 pounds), a 46% increase over the first quarter.
During the quarter, Cronos strengthened its liquidity by raising $100.0 million of gross proceeds through a bought deal offering of common shares in April. As of June 30, total liquidity was $118.0 million, providing the company with significant room to “execute its strategic priorities.”
2018 Second-Quarter Business Highlights
- Construction of the company’s 286,000-square-foot purpose-built indoor production facility in Stayner, Ontario remains on schedule and will start cultivation once it receives approval and a license from Health Canada.
- Cronos Australia was granted a medicinal cannabis manufacture license by the Australian Office of Drug Control in June. This license permits the manufacturing of cannabinoid-based products in Australia and is required for all forms of refining, extraction, concentration, and transformation of cannabis plants.
- Also in June, Cronos entered into a distribution partnership with Delfarma Sp. Z o.o, a pharmaceutical wholesaler with a distribution network of more than 5,000 pharmacies and over 200 hospitals that together reach approximately 40% of the Polish domestic market.
Business Highlights Subsequent to Second Quarter
- In the weeks following the end of the second quarter, Cronos announced a 50/50 joint venture with a group of investors to create a new partnership, Cronos Growing Company Inc. The new entity expects to build an 850,000-square-foot greenhouse for cannabis production in Kingsville, Ontario. Once fully operational, it is expected to produce up to 70,000 kilograms (154,325 pounds) of cannabis per year.
- Cronos entered into a supply agreement with Cura Cannabis Solutions, one of the world’s largest cannabis companies in the world by revenue. Cura signed a five-year agreement to purchase a minimum of 20,000 kilograms (44,092 pounds) of cannabis per year.
Cronos Group Financial Statements
Below is Cronos Group Inc’s unaudited, condensed, interim consolidated statements of financial position as of June 30, 2018 and December 31, 2017.
|(All figures in CA$ thousands.)||As of June 30, 2018||As of December 31, 2017|
|Property, Plant, and Equipment||$93,657||$56,172|
|Construction Loan Payable||$5,565||$5,367|
|Total Shareholder Equity||$227,270||$86,368|
|Total Liabilities & Shareholder Equity||$235,436||$101,029|
Legal cannabis is a multi-billion-dollar industry. Even then, the sector is still in its infancy. As of yet, Canada is the only industrialized country in the world to legalize the recreational use of marijuana.
Suffice it to say, the marijuana industry will likely continue to make waves (and make savvy investors wealthy) for years to come.
Like in every business sector, some stocks will soar and others will crash and burn.
The best marijuana companies will be those that have an experienced management team, strong infrastructure, global aspirations, strong partnerships and distribution agreements, innovative products, a strong research and development pipeline, and strong financials.
Cronos Group Inc has all of that.