Although its target product is green, Cronos Group (NASDAQ:CRON) and its legal marijuana peers have been seeing red lately. CRON stock in particular absorbed a severe beating to start off the second week of September, falling over 5%.
Of course, volatility in marijuana-based investments is nothing new. When the good times are rolling, investments like Cronos Group stock are akin to cryptocurrencies. In the height of the emotions, you don’t anticipate that things can sour.
Unfortunately, the downside is also very much like blockchain-based assets. If you’re not prepared for the whiplash, CRON stock is simply not for you.
Nevertheless, the 5% decline is surprising because compared to other major weed players, Cronos is the most stable. For instance, our own Chris Markoch recently wrote about the fundamental differences that make CRON stock stand out.
Primarily, Cronos refuses to perform the secondary share offering that has almost become a meme in this industry. One of the biggest criticisms of this tactic is that it dilutes equity. Instead, CRON is focused on sustainable expansionary strategies.
As a prime example, the cannabis firm paid for its Redwood Holding Group in cash. Such measures have helped mitigate its debt exposure, which stands at around $15 million. In contrast, Canopy Growth’s (NYSE:CGC) debt load is $700 million. Right there, Cronos Group stock has an advantage in terms of likely forward stability.
Yet on Monday, CGC only took a 1.6% hit. A fellow Canadian marijuana firm, Aurora Cannabis (NYSE:ACB), only dropped 1.2%. If Cronos Group stock is so stable, why is it taking the most punishment?
CRON Stock Must Ride Out Nearer-Term Hysteria
A possible explanation into the severe decline for Cronos Group stock is the underlying company’s aggressive investments toward cannabis-based vaporizers. Coincidentally, Markoch mentioned vaping pens and other derivative products as future viable revenue-making channels.
I wholeheartedly agree. However, a recent surge in supposedly vaping-related acute lung illnesses have captured the public’s attention. Recently, New York Governor Andrew Cuomo urged his constituents to cease vaping immediately. At present, the Centers for Disease Control and Prevention is investigating 450 cases across 33 states.
But how does this relate to cannabis and CRON stock? According to The New England Journal of Medicine, the vast majority (80%) of people who vaped and suffered acute lung injury used both nicotine and tetrahydrocannabinol (THC) or cannabidiol (CBD) products.
Even more damaging, The New England Journal of Medicine’s findings were corroborated by other sources, most notably the Illinois Department of Public Health. According to the latter’s research, several lung-illness patients had vaped materials containing THC.
As you might imagine, this news is not at all conducive for CRON stock. Even if there is no connection between vaping cannabis-based products and the lung-illness epidemic, the optics are terrible.
If this wasn’t bad enough, the Food and Drug Administration warned consumers not to use products containing THC. In Cronos Group’s defense, the company emphasizes the therapeutic component of the cannabis plant. Still, as I mentioned earlier, the stigma remains, potentially hurting Cronos Group stock.
Moreover, the mainstream media is really latching onto this controversial story. For example, Dr. Mehmet Oz of “The Dr. Oz Show” fame on Monday came out against vaping. Essentially, he urged viewers to cease vaping until the medical community can figure out what’s going on.
For CRON, it appears that a core revenue channel is being taken away.
Should Cronos Stock Stakeholders Worry?
Admittedly, the news does not look good. Again, even if the arguments lacked merit, the anti-vaping establishment has the upper hand to frame the narrative. As CRON stock is more levered to vaping than other cannabis investments, it has taken the brunt of the damage.
In the nearer term, shares might be more volatile than usual. However, in the long run, I don’t see this impacting the company.
One of the leading online vape shops in the country, Vapor Authority, recently posted a comprehensive rebuttal against the supposed connection between vaping and acute lung illnesses. Among their many arguments, the vaping retailer noted that neither the CDC nor the FDA have forwarded a causal factor. Moreover, it’s likely that illegal products or substances from the black market are responsible for this crisis.
It will take time for this issue to cool down. But once it does, CRON stock can get back to its business of growing cannabis in a fiscally sustainable manner.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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