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Strong Fundamentals Make Cronos Stock a Value Play

Theodore Kim

Over the summer, the marijuana stock sector has been hard hit. One of the broader exchange-traded funds for cannabis stocks, Alternative Harvest ETF (NYSEARCA:MJ), is hovering close to its 52-week low of $24.01 after a long slow slide from $38 earlier this March.

Cronos Stock Still Looks Like a Brilliant Investment for Altria

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MJ is the most widely followed and oldest ETF to track the global cannabis industry. The year-to-date return on MJ of -2% compared to the S&P 500 gain of 17% shows that pot stocks are definitely lagging. Yet, when the summer doldrums pass and investors return to the market, they will likely be seeking value and bottom fishing a few cheap buys.

Although it has fallen considerably, closing Tuesday at $11.30 from its 52-week high of $25.10, Cronos Group (NASDAQ:CRON) stock might be just the hidden downtrodden stock that starts to rebound fastest. 

Here are three key reasons why CRON stock could be an excellent value play when the sector eventually bounces back.

Cronos’ Strong Top-Line Revenue Growth

Cronos may not be the largest pot stock in terms of market cap or production in comparison with Canopy Growth (NYSE:CGC) or Aurora (NYSE:ACB). However, CRON stock delivers outstanding rock-solid sales growth — and will likely get stronger.

According to the earnings release of CRON stock earlier in August, revenue was $10.2 million CAD in Q2 2019, representing a 202% increase from $3.4 million CAD on year-over-year basis. This massive growth was due to the launch of the adult-use market in Canada.

Net revenue increased 58% quarter-over-quarter from $6.5 million CAD in the first quarter of 2019, primarily driven by increased sales in CBD oil, a product line also gaining rapid ground in the U.S. market. 

Global Tobacco Giant Altria Holds a 45% Stake in CRON Stock

Given CRON’s global distribution ambition, the partnership with Altria (NYSE:MO) should help drive growth by opening a wide variety of new distribution channels far beyond Canada and the U.S. For example, CRON has entered into an exclusive 5-year supply agreement with the German-based Pohl-Boskamp, a global pharmaceutical manufacturer that distributes to over 10,000 German pharmacies.

On top of another distribution agreement with Delfarma, which sells to some 5,000 Polish pharmacies and 200 hospitals, Cronos is already generating revenues in eight European markets as well as Israel and Australia.

In short, CRON stock will not be standing still waiting for legislative development in Washington, nor the cumbersome licensing process in Canada,  to meet or beat its long-term revenue targets. 

U.S. Federal Legalization Gains Steam

Recently, the U.S. Food and Drug Administration (FDA) issued a notice that it is reopening the public comment period to discuss dropping cannabis from the list of the most restricted illegal controlled substances. Even if the FDA does drop cannabis from their restricted list, this will not, of course, immediately legalize marijuana at the federal level. However, it is another step in the long and winding journey towards national legalization. And that journey will likely pick up speed as the 2020 presidential election year approaches. Most Democratic candidates have come out unequivocally in favor of legalization. 

Yes, Cronos has given away all of the 2019 gains in just the last few months. Yes, there will be considerable debate among politicians and investors alike about how long it may take the U.S. Congress to legalize marijuana given that the Republican majority in the Senate may continue past 2020 into 2022 or beyond. However, Cronos stock has strong underlying fundamentals; deep pockets form their strategic partnership with Altria and an up-and-running global distribution infrastructure.

When the volatile pot stock sector rebounds, CRON stock may bounce back towards its 52-week high.  

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

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