Cronos Group Inc: Recent Pullback Could Be an Opportunity

Cronos Group Inc: Recent Pullback Could Be an Opportunity
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Time to Check out Cronos Stock

In today’s stock market, quality items seldom go on sale. So when a solid marijuana stock experiences a pullback, it deserves investors’ attention.

I’m talking about Cronos Group Inc (NASDAQ:CRON), a vertically integrated cannabis company headquartered in Toronto, Ontario, Canada.

While I like to uncover the lesser-known tickers in the marijuana industry for our Profit Confidential readers, sometimes it’s worth revisiting a well-known pot stock.

Cronos happens to be one of the biggest players in the legal cannabis industry. A bonus is that, other than listing in its home country’s Toronto Stock Exchange, CRON stock also trades on Nasdaq.

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In an era when many pot stocks are only trading over the counter in the U.S., the fact that Cronos trades on a major U.S. stock exchange has boosted its appeal to American investors.

Indeed, Cronos stock has been a favorite among marijuana investors. Over the past 12 months, shares of Cronos Group Inc have more than doubled in price.

But as I mentioned earlier, what we are looking at right now is a stock that’s experiencing a pullback. In the morning of May 13, CRON stock plunged more than seven percent.

That was quite a sizable drop, considering that Cronos is one of the biggest marijuana companies in the world by market capitalization. What looked even scarier is that, on May 9, Cronos stock had already taken an 8.8% tumble.

So, should investors bail on this pot company, or should they consider this pullback to be an opportunity?

Well, based on the reasons behind the stock’s downward recent move, I’m leaning toward the latter.

Why Cronos Stock Was Falling

You see, CRON stock’s fall on May 13 was the result of a broader market decline.

Due to escalated trade tensions (China announced that it will be raising tariffs on U.S. products starting on June 1), U.S. stocks were having a very bad start to the week. As of this writing, the Dow Jones Industrial Average is down more than 500 points.

Looking around, we see that other big-name pot stocks trading on major U.S. stock exchanges—such as Tilray Inc (NASDAQ:TLRY), Canopy Growth Corp (NYSE:CGC), and Aurora Cannabis Inc (NYSE:ACB)—were also plunging on May 13.

So, we know that the latest drop in Cronos Group’s share price wasn’t exactly the company’s own fault. But what about its tumble on May 9?

Well, that was related to a piece of company-specific information that day: its first-quarter earnings report.

For the quarter, the company generated CA$6.5 million in net revenue, which was a whopping 120% increase year over year. Solid top-line results were driven by booming sales of cannabidiol (CBD) oil and dry flower. (Source: “Cronos Group Inc. Announces First Quarter 2019 Results,” Cronos Group Inc, May 9, 2019.)

For the quarter, Cronos had an operating loss of CA$558,000, which was a much narrower figure than the CA$2.2 million operating loss incurred in the year-ago period.

“In the first quarter of 2019, the business performed in line with our expectations,” said Cronos Chief Executive Officer Mike Gorenstein. “We continue to stay laser-focused on our strategy of building our supply chain, distribution, intellectual property and brand portfolios.” (Source: Ibid.)

However, as we know from CRON stock’s drop of almost nine percent on May 9, investors didn’t really cheer for this earnings report. In particular, while the company more than doubled its revenue year-over-year, that amount fell short of analysts’ expectation of CA$7.0 million.

Furthermore, stock market participants weren’t exactly pleased to hear about the company’s guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

During the earnings conference call, Cronos Group’s Chief Financial Officer Jerry Barbato said, “As we continue to invest in our business, our brands and R&D initiatives, our adjusted EBITDA will likely decline over 2019, will position the company for accelerated growth in 2020.” (Source: “Cronos Group, Inc. (CRON) CEO Mike Gorenstein on Q1 2019 Results – Earnings Call Transcript,” Seeking Alpha, May 9, 2019.)

Not a Market Favorite Right Now, But Still a Solid Pot Stock

Sure, a missed top-line number and a projected adjusted EBITDA decline don’t make the best news. However, as it stands, Cronos is still one of the best marijuana stocks on the market.

You see, the CRON stock bears can say what they want, but the blunt reality is, the company managed to sell a lot more cannabis and produce it at a lower cost.

In the first quarter of 2019, Cronos Group Inc sold 1,111 kilograms (2,449 pounds) of cannabis, a 122% increase year-over-year. Meanwhile, the company’s cost of sales was $2.69 per gram, down 14% from $3.13 per gram in the same period a year earlier.

Thanks to lower production costs, Cronos Group’s gross margin in the first quarter expanded from 47% in the year-ago period to 54%. (Source: Cronos Group Inc, op cit.)

Don’t forget, in the first quarter, Cronos closed a CA$2.4-billion strategic investment from Altria Group Inc (NYSE:MO), the maker of “Marlboro” cigarettes.

Altria now owns around 45% of Cronos and has a warrant to increase its stake by another 10%. Having a strategic partnership with the tobacco giant could bring Cronos the additional financial resources, product development capabilities, and regulatory expertise that are needed to expand its presence in the global cannabis industry.

Cronos Group Inc Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

At the end of the day, keep in mind that marijuana stocks are some of the most volatile tickers on the market. And since uncertainty has been a theme for U.S. equities lately, marijuana companies—Cronos included—could experience further volatility.

The company’s business remains solid, however. If Cronos Group Inc can continue producing and selling more cannabis while improving its operating efficiency, it could turn out to be a big winner in the long run. In other words, CRON stock’s recent pullback could be a good investment opportunity.