Shares of Cronos Group (CRON - Free Report) have tumbled over 40% in the past three months, which is actually slightly better than many of its marijuana producer peers. The legal weed industry is still in its infancy and practically all of the once high-flying pot stocks have fallen back to earth.
Now the question is should investors think about buying some shares of CRON ahead of earnings, as a bet on a marijuana market comeback?
Quick Marijuana Industry Overview
Marijuana has only been completely legal in Canada for a year. Canada’s “Cannabis 2.0,” the legalization of derivatives such as edibles, beverages, vapes, and other concentrates, will roll out in December. Meanwhile, marijuana is now recreationally legal in 11 states and D.C., with many more set to come. Given the current momentum, the tides could soon sway in favor of federal legalization in the U.S.
As it stands, the North American legal cannabis industry is projected to surge from $9 billion in 2017 to $32 billion by 2020. The market’s potential has seen firms such as Molson Coors (TAP - Free Report) , Altria (MO - Free Report) , and Corona brewer Constellation Brands (STZ - Free Report) all position themselves to benefit down the road. There are also marijuana ETFs, such as ETFMG Alternative Harvest ETF (MJ - Free Report) and REITs such as Innovative Industrial Properties (IIPR - Free Report) .
Scotts Miracle-Gro (SMG - Free Report) , which is currently part of our Marijuana Innovators portfolio, just saw its stock jump over 6% after it posted a significant top line beat and raised its 2020 guidance for both revenues and earnings. Meanwhile, Wall Street did not treat GW Pharmaceuticals (GWPH - Free Report) nicely.
Cronos is part of a somewhat small group of pure-play marijuana stocks, alongside Aurora Cannabis (ACB - Free Report) , Tilray (TLRY - Free Report) , Canopy Growth (CGC - Free Report) , and Aphria (APHA - Free Report) .The Canadian company boasts international production and distribution across five continents and is set to expand as legalization spreads.
Uncertainty looms, but the overall industry is still projected to expand in a serious way. With this uncertainty has come bets against marijuana stocks in the form of short positions. There are roughly 42 million shares short on CRON, or roughly 12% of the firm’s total shares outstanding, according to the most recent numbers.
This is hardly crazy for the cannabis industry, with ACB at around 16% and roughly 12% for CGC—for reference fintech firm Square is at 8.2% and Tesla is at 20%. Plus, as our Marijuana Innovators portfolio editor David Borun pointed out recently: “Though shorting marijuana stocks has worked so far in 2019, the shorts don’t have much more profit potential to the downside, but risk losses of 100% or more if stocks rally once again to previous highs.”
CGC stock is down 15% in the past 12 months, which is far below the S&P 500’s 9% gains but far better than both Aurora and Canopy. However, as we touched on, Cronos stock is down big in the last six months. CRON shares closed regular trading Wednesday at $8.33, down roughly 61% from their 52-week highs.
Q3 Outlook & Beyond
Our Zacks Consensus Estimates call for Cronos sales to soar 261.9% from $2.8 million in the year-ago period to $10.42 million in Q3 2019. The company’s Q4 revenue is then projected to surge 310% to help lift full-year fiscal 2019 sales by 230% to $39.9 million. Better yet, CRON’s 2020 revenue is expected to skyrocket 256% higher to hit $142.29 million.
Some might expect to see CRON’s losses grow as it tries to expand in this budding industry. Yet, the firm’s adjusted Q3 earnings are projected to come in flat from the year-ago period at -$0.03 per share.
The company is then expected to post a slightly smaller Q4 loss, with full-year fiscal 2019 expected to come in flat at -$0.08 per share. Peaking even further ahead, Cronos is expected to post a smaller loss in fiscal 2020.
The company is currently scheduled to release its third quarter 2019 earnings results on Tuesday, November 12, which means our estimates could change. But as it stands, CRON is a Zacks Rank #2 (Buy) at the moment, based on its positive earnings revision activity.
Investors who can handle the significant risk that comes with Cronos and the broader marijuana industry right now might want to consider scooping up a few shares of CRON stock on a huge dip, as a bet on a cannabis comeback.
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