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Investors are Waiting for the Real Cronos to Stand Up

Posted on Thursday, February 27th, 2020 by Chris Markoch

Investors are Waiting for the Real Cronos to Stand Up

In the span of a couple of weeks, there has been good news and bad news about Cronos Group (NASDAQ:CRON). The good news came on February 11 when the company received news that suggests it may be one of the most well-positioned cannabis stocks for the long haul.

The bad news came on February 26 when the company abruptly postponed the delivery of its fourth-quarter earnings report.

If the good news is to be believed, Cronos may be ready to live up to its potential. Back in November, I wrote that Cronos was playing a different game than companies like Aurora Cannabis (NYSE:ACB) who is trying to be one of the main cannabis producers. Cronos is taking an asset-light approach to growth that includes building a network of co-manufacturing joint ventures that allows them to focus on specific niches.

However, failing to deliver an earnings report, when you get to set the date as a company makes the company look disorganized at best. At this point, Cronos has given investors no reason to believe this is anything more than an error by its accounting team. However, after a year in which the cannabis sector was riddled by negative headlines, investors are hyper-sensitive.

The cannabis sector is starting to see green shoots

The cannabis sector remains one of the most volatile sectors in the market. But recently there have been signs that pot stocks are moving from “uninvestable” to merely high risk. Much of the optimism is because of Cannabis 2.0 which is bringing derivative products like vapes into the market.

However, the real new wave in cannabis is going to be in the form of consolidation. And Cronos looks like it has the capital to make the cut.

According to a leading cannabis investment management firm, Cronos Group has the most cash on hand of the major players in the cannabis sector. Ello Capital released its results on February 11, 2020. According to Ella’s analysis, Cronos has seven years of cash remaining.

This is in stark contrast to what are considered two of the leading cannabis companies. Aurora Cannabis has just two months of cash left. And according to Ella’s analysis, Canopy Growth (NYSE:CGC) has just under eight months of cash left. Both companies dispute the report. Green Growth Brands (OTCMKTS:GGBXF) scored the worst. Ella surmised that GGB has only one month of liquidity remaining.

 In its report, Ello says that “access to capital remains the biggest challenge for operators in the cannabis industry”. Furthermore, the industry is still heavily regulated in the United States and Canada. And raising new capital is becoming more difficult. Viridian Capital Advisors, this slowdown started approximately a year ago. By November and December of last year, financing had basically dried up. In fact, cannabis companies raised only $11.3 billion of capital in 2019, a 20.3% decline from the year prior.

Cronos is certainly benefiting from the backing it receives from Altria Group (NYSE:MO). Altria invested $1.8 billion into Cronos in 2018. But the company is still burning cash and will need to start showing investors that it can start earning revenue.

Cronos can’t have the unforced errors

Any bump the stock received from this news was short-lived. On February 26, Cronos announced they were delaying the release of their fourth-quarter earnings report that was scheduled for February 27.  It bears repeating that on the face of it, this looks like a simple, albeit untimely accounting error. However, it illustrates a larger problem that besets the entire cannabis sector. It seems that every company has a difficult time getting out of its own way.

The bottom line on Cronos stock

If you’re betting on Cronos, you have to be in for the long haul. The company is not likely to produce anything approaching attractive growth in the near term. However, Cronos is getting tutored by Altria and with a healthy cash position will undoubtedly be a player when the industry consolidates.

Better still, the stock is now trading at 1.37 times the company’s last stated cash position. It is down nearly 80% from its high in March 2019. So while real growth may take some time, the stock may have finally stabilized.

Of course, if the delay in the fourth-quarter earnings becomes something more than just an accounting snafu, Cronos could become the laughing stock of the industry. Until that report comes out, Cronos has to be a hold. But better days could be ahead.

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