<p>Cronos Group (NASDAQ: CRON) shares rose 12% on Wednesday, just two days after the company submitted a document to the US Securities and Exchange Commission about its delayed earnings report. Cronos initially said they would report the results on February 27. The company said on Monday that it is extending its application deadline by 15 days while its board reviews the company’s finances.
Fair or not, cannabis stocks are fighting an uphill battle with many retail investors questioning them to prove their businesses legitimate. Investors who are hesitant to dip their toes in the water are likely to be hypersensitive to news of financial inconsistencies.
The market does not seem particularly concerned about the impact that the audit’s results may have on the Cronos share. However, investors should expect that Cronos will potentially recover revenues and / or revenue numbers that go back several quarters.
In its application on Monday, Cronos’ management said its internal audit committee is working with external forensic auditors to conduct a review of “multiple bulk purchases and sales of products through the wholesale channel and the appropriateness of reporting revenue from those transactions.”
Like all legal languages, this characterization is extremely opaque. Cronos said it plans to publish its quarterly and full-year reports “quickly”. It also said that there is no guarantee that the reports will be ready by the end of the two-week extension.
The problem with such situations is that they leave investors almost completely in the dark. The only thing investors know is that someone within the company raised questions about Crono’s finances. I assume that if these issues were not credible, no review would be made.
So now investors have to wonder how “inappropriate” the company’s reported revenue is and how far back the issue will go.
Bull Case for Cronos Stock
I have previously been relatively bullish on the Cronos stock. What I liked most about the company is its strong balance sheet, a rarity among cannabis stocks.
Bank of America analyst Christopher Carey says he is still bullish on the stock. However, he lowered his price target by 15% due to the uncertainty created by the audit news. He said the audit news was “unfortunate” and that the company had issues it needed to address. But Crono’s cash position and financial support from Altria (NYSE: MO) make it one of the best investments in the cannabis space.
“We see Cronos as one of the more compelling fundamentals in cannabis, reflecting the second strongest balance sheet in the sector (after Altria investment) and a forward-looking strategy (cannabinoid development platform),” says Carey.
Carey retains his “buy” rating and his new price target is $ 8.24.
Before the review issue is resolved, it is unlikely that the stock will outperform its peers. Carey said Cronos has the second best balance sheet in the group. The company with the best balance sheet is Canopy Growth Corp (NYSE: CGC).
Over the past month, the CGC share has decreased by a total of 20% and the CRON share has decreased by 19.7%. Assuming you are a long-term investor who wants to buy a cannabis stock with a strong balance sheet and a large financial backer. Why choose Cronos over Canopy and its investors Constellation Brands (NYSE: STZ) right now? One company has an ongoing review of its finances and the other does not.
Stifel analyst W. Andrew Carter downgraded the Cronos stock from “buy” to “hold” after the audit announcement. He likes the stock in the long run, but said he will stay on the side until the review is complete.
“We think the outlook for the equities is difficult to analyze at this time, given the investigation and the lack of SEC archives, at least in the short term,” Carter said.
Carter says the stock will underperform until the issue is resolved and investors need to be patient.
“While we believe that the organization is striving aggressively for this [15-day] deadline, we do not believe the company will meet the extension that suggests the company will need to submit an action plan and follow a 180-day deadline set by NASDAQ, he says.
How to play it
In other words, 180 days is three months. Investors may not get a resolution for a while. In the meantime, the stock is unlikely to gain too much bullish momentum. I’m honestly surprised it’s bounced off the audit news so quickly. I would not be surprised if it will be withdrawn in the coming weeks unless the problem is resolved.
At this point, I would currently recommend investors to switch to the Canopy Growth stock. The two companies represent essentially the same cannabis essay, but Canopy has much less risk in the short term.
Wayne Duggan has been a US News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense”, which focuses on investment psychology and practical strategies to surpass the stock market. At the time of writing, Wayne Duggan does not hold any position in any of the above securities.