<p>Potted plants have been killed in the last six months. From early May to early November, each of the four major stocks – Canopy Growth (NYSE: CGC), Cronos (NASDAQ: CRON), Aurora Cannabis (NYSE: ACB) and Tilray (NASDAQ: TLRY) – have thrown at least 50% of their value. CRON shares, even with a still very large decline of 50% since the beginning of May, did the best of the bunch.
It’s like a bad joke: the good news is that the Cronos stock beats its peers; the bad news is that half of its value was lost. (cue rimshot …)
But it’s actually a bit of both good and bad news. Overall, the CRON shares will recover from the latest sale. But it will not come back now or anytime. Instead, the Cronos stock is in a classic case of “short-term pain, long-term gain”.
The investment implication is simple. Stay away from the CRON stock for now. When cannabis market foundations improve, buy CRON shares.
Three factors in Cronos Stock favor
The Cronos share will eventually return for three major reasons.
A long-term cannabis market foundation is healthy and suggests that this will be an industry worth hundreds of billions of dollars a day. Decades of data show that marijuana consumption is growing and rising, while alcohol consumption is declining, so consumers like to smoke cannabis almost as much as they want to drink alcohol today. As soon as it is fully legal, there is a great demand to support a global cannabis market that is equivalent to the global market for alcoholic beverages, which is an industry of several hundred billion dollars.
Second, Cronos has an advantageous competitive position to grow the cannabis market by several hundred billion dollars. The grower got the investors’ crown jewel when the tobacco giant Altria (NYSE: MO) agreed to pour $ 1.8 billion into the cannabis launch. Altria is a $ 85 billion tobacco giant with almost unlimited resources – and Cronos has them in his back pocket. No other cannabis company, other than Canopy, has this luxury, and Canopy’s partner – Constellation Brands (NYSE: STZ) – is about half the size of Altria. In terms of the opportunity to invest in the global cannabis market of several hundred billion dollars, Cronos is second to none, which means that this company has a huge profit growth potential in the coming decade.
Three, CRON shares are cheaper than peers. Based on corporate value, CRON shares are traded at 3.3 times consensus tax revenue from 2021, according to YCharts. It’s far below Canopy’s 3.7x 2021 EV for sale multiples, and even further below Tilray’s 4.4x 2021 EV for sale multiple. It is actually the lowest 2021 EV-to-sales multiple among the big four pot. This relative undervaluation should give CRON stocks enough firepower to drive higher as macro cannabis sentiment improves.
Given these three factors, it is very likely that the CRON stock will eventually return from today’s depressed levels and shoot significantly higher in the long run.
Short-term pain is here to stay, for now
Although the Cronos stock will return from today’s depressed levels in the long run, the reality is that it will not return now or anytime soon. Instead, shaky short-term basic cannabis markets will keep the pot largely depressed for the foreseeable future.
The Canadian cannabis industry is a mess right now. There are supply problems caused by choppy, inconsistent, clumsy and slow legislation. This has hampered both the number of legal cannabis store openings in Canada and the volume of cannabis sold on the legal market. There are problems with demand, as limited supply has led to higher prices and higher prices have kept consumers largely on the black market. Simultaneous supply and demand problems have created significant revenues and marginal winds for legal cannabis companies. The result? Reduced sales growth and marginal erosion.
Even worse is that the prospect is that this dynamic will continue. There are no signs out there that the legislation will start moving faster. Until then, the legal market will delay the black market in terms of supply. This will lead to continued demand headwinds, which will result in lower revenues and lower margins.
As long as all this remains true, it will be difficult for all pots – including CRON shares – to bounce back. Before buying the dip in Cronos, investors should wait for the basic conditions for the cannabis market to improve in the short term, starting with accelerated and more streamlined legislation.
Bottom row of CRON bearing
I like CRON stocks in the long run. But I do not like this and now. Instead, the best thing to do here and now is to monitor the situation from the side and only buy CRON shares at this dip when broader cannabis market foundations are improving. Until then, the sites are the best (and safest) place to hang out.
At the time of writing, Luke Lango was long CGC.