Cash isn’t everything when investing in cannabis stocks. Over the past 13 months, the marijuana industry has done a 180 — and not the good kind. Following a first quarter in 2019 that saw more than a dozen pot stocks gain at least 70%, the past 13 months have featured across-the-board declines for North American…
Over the past 13 months, the marijuana industry has done a 180– and not the great kind. Following a first quarter in 2019 that saw more than a lots pot stocks gain at least 70%, the past 13 months have included across-the-board decreases for North American marijuana stocks of 50%to 95%.
To our north, Canadian certified producers have been held back by a huge selection of regulative problems. Health Canada was sluggish to approve growing and sales licenses and postponed the launch of high-margin derivatives until mid-December. Furthermore, Ontario’s previous lottery-based retail licensing system didn’t work, with simply two dozen dispensaries opening in the very first year of adult-use weed being legal.
Meanwhile, in the U.S., high tax rates on legal marijuana have made it virtually impossible for retailers to compete with the black market.
The cherry on top is that a lot of North American pot stocks have likewise had trouble accessing nondilutive forms of financing, leaving some pot stocks rushing for money. But as cannabis investors have found out, cash isn’t everything when it comes to investing in marijuana stocks.
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Take Cronos Group( NASDAQ: CRON) as a perfect example. Basically, Cronos Group has $1.5 billion in net cash and a market cap of $1.
Cronos entered into this cash hoard in March 2019, when tobacco giant Altria Group( NYSE: MO) closed on a $1.8 billion equity financial investment that provided it a 45%stake in the business. The expectation was that Cronos would be able to use this capital to make acquisitions, push into international markets (consisting of the United States), surpass its existing infrastructure, and support the launch of derivatives, which happened in late 2019.
Plus, Altria has years of experience in marketing smokable products to customers. With a 45%equity stake in Cronos and a U.S. tobacco company that’s seen steadily decreasing cigarette shipments, it was anticipated that Altria would help in the development and launch of cannabis-focused vape items in a legalized acquired market. Amongst the different alternative-consumption options, vapes have actually been pegged by Wall Street as the most significant growth opportunity.
With a brand-name collaboration and a considerable amount of money in tow, Cronos Group may look like a no-brainer buy. Even with $1.5 billion in money, it stays an extremely avoidable pot stock
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Therefore far, Cronos Group has just put its money to work with one significant deal.
Sadly, the cannabidiol (CBD) fad seems to have blown over as rapidly as it entered being, and the U.S. Fda (FDA) is partially to blame. The FDA has actually been really clear that it’s not going to enable CBD products into food or beverages for the time being and has raised security concerns about long-lasting CBD use. That’s put a genuine cap on the near-term capacity for the hemp industry and CBD. In other words, Cronos’ plans to take the U.S. by storm haven’t worked out as planned.
Equally essential, Cronos Group’s vape aspirations have actually been warded off in a number of ways.
Another issue is the coronavirus illness 2019 (COVID-19) pandemic, which first manifested in China. Throughout the months that parts of China had executed mitigation steps developed to thwart the spread of COVID-19, supply issues appeared for a variety of markets, including cannabis You see, nearly all vape pens are made in China, putting the North American vape industry at risk of a substantive product scarcity in the near term.
Likewise of issue is that Quebec and Newfoundland & Labrador have actually prohibited vape sales, pending additional research. Alberta prohibited vape sales at first, but its restriction just lasted for 2 months. The point here is that the Altria-Cronos tie-up hasn’t had an opportunity to shine due to a variety of concerns.
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Making matters worse for Cronos Group, it’s a company that primarily ignored production escalation in 2018 and 2019 in favor of calculated moves into the derivatives market. With those derivative products not living up to expectations thus far, Cronos’ production capabilities have actually been exposed as subpar, at least for its size.
What do I suggest by below average? Cronos has one totally operational grow farm that generates a reasonable amount of cannabis on a yearly basis. At its peak, Peace Naturals is capable of 40,000 kilos a year. Cronos Group repurposed some of this center to manage processing and research study for higher-margin derivative items. By contrast, Aurora Marijuana, Canopy Growth, Aphria, and Tilray are all completely efficient in maybe 100,000 kilos to 300,000 kilos in peak output each year. You can discover publicly traded Canadian licensed producers at sub-$70 million market caps with more output potential than Cronos Group. That’s what I imply when I say below average.
Suffice it to state that Cronos Group’s meager harvest hasn’t resulted in anything close to operating success. To be clear, Cronos Group has been profitable in the past, but this includes a big asterisk That’s because it’s counted on fair-value changes and revaluing its derivative liabilities (i.e., warrants held by Altria Group connected to its equity investment) to push into the green. Based on no-nonsense accounting, Cronos isn’t anywhere near recurring profitability.
What’s more, Cronos announced a restatement of its 2019 financials in mid-March, getting rid of around $7.6 million Canadian in sales from a currently anemic top-line figure.
Put clearly, Cronos Group’s cash isn’t from another location sufficient of a dangling carrot to make this stock a buy.
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