Should You Buy Cronos Group (TSX:CRON) on the Dip?

Cronos Group (TSX:CRON)(NASDAQ:CRON) is perhaps the most expensive cannabis stock as far as forward valuations are concerned. It’s also been the target of several analyst downgrades thanks to its premium multiple to its peers. With the entire sector experiencing a pullback during the past few weeks, here are two reasons why you should buy Cronos, and one reason why you shouldn’t.

Altria partnership gives it unprecedented scale

It goes without saying that Altria’s controlling interest in Cronos gives it access to scale that rivals only Canopy Growth. For example, Altria’s retail footprint spans 230,000 physical locations across the United States, and if the company’s previous investment in e-cigarette maker JUUL is any indication, we can anticipate the tobacco giant to promote Cronos’s products via premium shelf space, when Cronos begins its aggressive CBD ramp up in 2020.

But more than just a $2.4 billion liquidity injection and shelf space, the Altria investment means Cronos will benefit from Altria’s expansive marketing and procurement talents, and finally (hopefully) be able to tackle the supply chain bottlenecks the company has been facing since inception.

For context: Cronos ended its latest quarter with just 181 kgs, or $1 million, of finished dried cannabis and 200 kgs of oils, also worth $1 million. This is a far cry from rivals such as Aurora, which ended Q1 with $57.3 million worth of dried cannabis and $3 million worth of oils.

Altria: more than tobacco

Most people forget that Altria is also a master of alcoholic beverages. In 2018, Altria reported $691 million in revenues from its wine business and holds a 10% economic stake in AB Inbev, the world’s largest brewer and distributor.

This level of beverage expertise is almost rivaled by few, and we can anticipate Cronos to leverage this channel once we see the edibles market (particularly CBD-infused beverages) come online. Furthermore, Altria’s investment grants Cronos an enviable level of legitimacy in the eyes of “mainstream” consumer products manufacturers and institutional investors. This mainstream appeal can already be reflected in Cronos’s latest hire for its chief innovation officer, who had extensive experience with Mondelez International.

But what are you paying for?

Don’t let the recent pull back fool you: Cronos remains an expensive stock, particularly as its core business has lagged its competitors by a wide margin. Not only did Cronos report abysmal realized prices, but it barely managed to secure 4.2% of total dried cannabis sales in Canada and less than 1% of oils volume (based on StatsCan numbers and company filings) during its latest quarter.

Moreover, with just two recreational brands to its name, “COVE” and “Spinach” (which appear to have underwhelming user response on popular cannabis review sites) I just don’t see the company making massive strides in market share. In fact, minus the Altria investment, I would estimate the company to be trading at a fraction of its market cap. Therefore, a bet on Cronos here is a bet on Altria turning things around. And at 23 times FY 2020 sales (factoring in a very optimistic CBD ramp up in the U.S.) that is a very lavish bet, particularly as a name like Canopy Growth trades at 10 times consensus FY 2020 sales.

In summation, the $2.4 billion question this comes down to is: is Cronos really worth twice as much as Canopy, thanks to Altria? I’ll let you decide.

You might be missing out on one of the biggest opportunities in Canadian investing history…

Marijuana was legalized across Canada on October 17th, and a little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

Besides making key partnerships with Facebook and Amazon, they’ve just made a game-changing deal with the Ontario government.

One grassroots Canadian company has already begun introducing this technology to the market – which is why legendary Canadian investor Iain Butler thinks they have a leg up on Amazon in this once-in-a-generation tech race.

This is the company we think you should strongly consider having in your portfolio if you want to position yourself wisely for the coming marijuana boom.

Learn More About This TSX Stock Now

More reading

Fool contributor Victoria Matsepudra has no position in any of the stocks mentioned.

Source: The Fool
Should You Buy Cronos Group (TSX:CRON) on the Dip?
The Fool

The Motley Fool
Contributor for
The Motley Fool is dedicated to helping the world invest — better. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, mutual funds, and premium investing services.

In all we do, we take a different approach.

We believe – and have proven over decades – that the individual investor can beat the market.

We believe that anyone can do it, even if they don’t have a lot of time or money to devote to investing.

We believe in a long-term outlook, helping people build wealth over time.

We believe that the person best positioned to take care of your financial future is you.

And we work tirelessly on behalf of our hundreds of thousands of members who are enjoying the opportunities that come with having enough money to do the things that matter to them.

While we are headquartered in Alexandria, Va., The Motley Fool advocates for the individual investor around the globe with offices in the UK, Australia, Canada, Singapore, and Germany.

Related posts