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I’m Glad I Don’t Own Cronos Group Stock and Here’s Why

Mark Putrino

If I was a holder of Cronos Group (NASDAQ:CRON) stock, I would have serious anxiety about the much-hyped cannabis investment.

Here's why I wouldn't touch CRON stock

Source: Shutterstock

While CRON stock is up 46% this year, most of those gains occurred in January. Eventually, though, I believe that the company will be facing some tough times — and in the not-so-distant future. Here are five things to consider:

CRON Stock Is More Expensive Than Its Peers

Various metrics indicate that Cronos stock is more expensive than its peers.  The company has an extremely high price-to-sales ratio of 336. To put that into perspective Tilray (NASDAQ:TLRY) has a PS ratio of 135, while Aurora Cannabis (NYSE:ACB) runs at 79. Moreover, the PS ratio for Aphria (NYSE:APHA) and Canopy Growth (NYSE:CGC) is 52 and 68, respectively.

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In addition, Cronos is the only member of this group to have negative gross margins. Aurora’s gross margin is 11%, while Tilray, Aphria and Canopy all feature double-digit margins. Cronos has a gross margin of -21%.  Judged from these two metrics, CRON stock is clearly a much more expensive investment than its peers.

The Coming Price War

Few people talk about it, but I believe a price war will erupt in this industry very soon. That is because investors are starting to realize that growing marijuana outside is significantly cheaper than growing in an indoor facility or a greenhouse.

Admittedly, advantages exit to growing in indoor facilities, such as better security and better quality. However, the cost advantages of outside growing outweigh them.

Still, Cronos seems to grow the vast majority of its cannabis indoors.  If the company doesn’t develop outdoor growing, it may not be able to compete with outdoor projects. Eventually, this will hurt the Cronos stock price.

Potential Share Dilution

One thing that really stood out to me when I was reading Cronos’ income statement: the massive amount of potential dilution.

The company just reported earnings per share of $1.95. However, the diluted share earnings were only 48 cents. Regular earnings per share is the net income of the company divided by the number of outstanding shares. Diluted earnings per share is what the earnings would be if all of the company’s bonds that can be turned into shares are converted.

This potential share dilution is very concerning. Therefore, I don’t want to buy Cronos Group stock because it exposes me to two risks.

First, CRON stock trades in a volatile market. Second, management can potentially dilute shares at any time, presenting a hidden but serious threat to my portfolio.

Wall Street Is Falling Out of Love with Cronos Stock

At this time last year, it seemed like every analyst was extremely bullish on the cannabis industry. But as the sector consolidates, it seems to be losing its luster.

For instances, analysts have issued some downgrades. Further, I noticed a rise in bearish sentiment seems. And on top of it all, The Street seems to favor CRON stock the least out of the large growers.

The average rating for Cronos stock is a hold. In contrast, the other four — Tilray, Canopy, Aurora and Aphria — have average ratings of overweight.

Finally, you don’t need to be a market guru to see that the $14 level is important support for CRON stock. This level is support because it was resistance in September and December of last year.

Resistance levels become support levels because the investors who sold or shorted Cronos Group stock at $14 profited from the decline. But then when Cronos stock rallied above $14, the shorts lost money, creating a panic.

As of this writing, Mark Putrino did not hold a position in any of the aforementioned securities.

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