<p>Is today a good time to buy Cronos Group (NASDAQ: CRON) shares? “Cannabisphere” is, to say the least, a hot mess. But with the support of tobacco giant Altria Group (NYSE: MO), Cronos shares can have the money and support to survive the maelstrom. When rivals climb to sell assets and raise capital, this large pottery company can be a buyer in the seller’s market.
Still, valuation can be a reason not to buy at today’s prices. Thanks to its strong balance sheet, Cronos is traded at a premium. It is a similar situation we see in Canopy Growth (NYSE: CGC). The underlying industry may be in turmoil. But thanks to a cash-rich balance sheet and a strategic partner with a deep pocket, the shares continue to be valued higher than, for example, Aurora Cannabis (NYSE: ACB) or Hexo (NYSE: HEXO).
Still, paying a premium can be a rational step. The Cronos share may soar higher in the next few years. Why? Their unique strategy. With a focus on the marketing and sales aspect – as opposed to production – Cronos can get the advantage when integrated pot manufacturers close or sell facilities.
With this in mind, let’s dive in and see what the verdict is on Cronos shares.
Why Crono’s stock may come back
It is safe to say that the Canadian pot has many problems. Oversupply and regulatory headwinds remain. Add to that the long-standing odds of US federal level legalization. Put it all together, and it does not seem smart to buy pot stocks today.
But Cronos shares may be the exception. At least according to MKM Partners Bill Kirk. The analyst recently upgraded shares to buy from Hold. The reason? Namely the Altria connection. Thanks to the tobacco giant’s existing relationships with convenience store chains, Cronos has a major infrastructure advantage if and when the use of recreational pots is legal throughout the country.
Kirk is also bullish on Cronos thanks to its great liquidity. Of a market capitalization of $ 1.9 billion (based on the March 11 closing price of $ 5.41 per share), the company has $ 1.5 billion in cash.
Yes, the company bleeds cash like its peers. But thanks to an easy-to-access approach, cash burning is lower than for Canopy or Aurora. With Crono’s business model, you can see the similarities between it and its partner Altria.
Most marijuana companies have tried to handle all aspects of pot production. From running growing facilities to selling it at retail locations. Cronos uses the tobacco industry’s game book. Altria and the other American tobacco companies do not own tobacco plants. They buy it at the wholesale level, process it into cigarettes and other tobacco products and sell it through third-party retailers with a high mark. The same business model with a high margin can be applied to the leisure pot.
Kirk is a convincing case for Cronos as one of the best pot. Still, it does not make shares a purchase at today’s prices. Especially with valuation and other red flags as important disadvantage risks.
Watch out for valuation and other red flags
Despite the fact that shares have hit in recent months, the Cronos share is still overvalued. Shares are traded at a company value / sales ratio of 17. This is higher than even properly priced Canopy Growths EV / sales ratio of 12.5.
If you look at the other pot names, the valuation deviation is even greater. Tilray (NASDAQ: TLRY) has an EV / sales ratio of 7, while Aurora and Hexo are both below 6.
You could argue that Crono’s strong balance sheet guarantees a premium. Still, there are other factors that can give investors a break. As InvestorPlace Wayne Duggan wrote on March 5, Cronos is delaying revenue due to a review of its finances. In addition, the company expects a massive write-down of inventory. If these risks become worse than expected, the shares may dive even lower.
With this in mind, why buy now? These risk factors, together with a lower trend in the stock market, make the short-term disadvantage more likely than upwards.
Waiting and seeing can be the best method
The conclusion of the Cronos share: consider it a buy … at a lower price. While stocks have fallen more than 75% from their 52-week high, the stock is not exactly cheap. You can argue that the company can grow into its valuation. But with the ongoing review and the weak foundations of the Canadian pot market, it is difficult to place much confidence in future results.
On the other hand, Crono’s underlying business model can be a solid path to future profitability. While colleagues try to handle all aspects of pot production, Cronos uses the smart tobacco industry’s game book. This can help the company develop into a cash cow business.
Add the Altria connection and the Cronos share can be a big winner. But it is over a long time horizon.
Even with changes in NFL marijuana policy likely to arouse sentiment this week, the best bet is to wait for the stock to reach a more reasonable valuation.
Thomas Niel, contributor to InvestorPlace, has been writing a one-share analysis for web-based publications since 2016. At the time of writing, Thomas Niel had no position in any of the above-mentioned securities.