Even With $1.5 Billion in Money, This Pot Stock Isn’t a Buy

Cash isn’t everything when purchasing marijuana stocks.

Sean Williams

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 lots pot stocks gain at least 70%, the past 13 months have actually featured across-the-board decreases for North American cannabis stocks of 50%to 95%.

To our north, Canadian licensed producers have been held back by a variety of regulative concerns.

Meanwhile, in the U.S., high tax rates on legal marijuana have actually made it practically impossible for merchants to take on the black market.

The cherry on top is that many North American pot stocks have likewise had problem accessing nondilutive kinds of funding, leaving some pot stocks scrambling for cash. But as marijuana financiers have actually found out, cash isn’t whatever when it concerns investing in marijuana stocks.

A handful of dried cannabis buds lying atop a messy pile of cash.

Image source: Getty Images.

Cash isn’t constantly king in the marijuana space

Take Cronos Group( NASDAQ: CRON) as a best example. Basically, Cronos Group has $1.5 billion in net cash and a market cap of $1.

Cronos entered this cash hoard in March 2019, when tobacco giant Altria Group( NYSE: MO) closed on a $1.8 billion equity financial investment that offered it a 45%stake in the company. The expectation was that Cronos would have the ability to utilize this capital to make acquisitions, push into worldwide markets (including the United States), improve upon its existing facilities, and support the launch of derivatives, which occurred in late 2019.

Plus, Altria has years of experience in marketing smokable items to customers. With a 45%equity stake in Cronos and a U.S. tobacco organisation that’s seen steadily declining cigarette shipments, it was anticipated that Altria would aid in the development and launch of cannabis-focused vape products in a legalized acquired market. Among the various alternative-consumption alternatives, vapes have actually been pegged by Wall Street as the most significant growth chance.

With a brand-name partnership and a considerable amount of cash in tow, Cronos Group might appear like a no-brainer buy. Even with $1.5 billion in money, it stays a highly preventable pot stock

A bearded man in sunglasses exhaling vape smoke while outside.

Image source: Getty Images.

Cronos Group’s growth strategies have failed

Thus far, Cronos Group has only put its cash to work with one notable deal. In 2015, it got Redwood Holdings for $300 million– $225 countless which was paid in cash Redwood is the company behind the Lord Jones brand name of CBD-based appeal items.

Unfortunately, the cannabidiol (CBD) trend appears to have actually blown over as rapidly as it entered being, and the U.S. Food and Drug Administration (FDA) is partly to blame. The FDA has actually been really clear that it’s not going to permit CBD products into food or drinks for the time being and has actually raised safety concerns about long-term CBD use. That’s put a genuine cap on the near-term potential for the hemp market and CBD. Simply put, Cronos’ strategies to take the U.S. by storm haven’t worked out as prepared.

Equally important, Cronos Group’s vape aspirations have actually been prevented in a variety of ways. Firstly, the U.S. suffered through the vape-related health scare last spring and summertime, leading to thousands of hospitalizations and lots of deaths. Although researchers had the ability to peg the likely reason for these mysterious lung health problems on vitamin E acetate found in illicit-channel item, a little part of the items tested including vitamin E acetate came from the legal market.

Another issue is the coronavirus disease 2019 (COVID-19) pandemic, which first manifested in China. Throughout the months that parts of China had actually carried out mitigation procedures developed to thwart the spread of COVID-19, supply issues appeared for a variety of markets, including cannabis You see, almost all vape pens are made in China, putting the North American vape industry at danger of a substantive product shortage in the near term.

Likewise of issue is that Quebec and Newfoundland & Labrador have actually prohibited vape sales, pending further research study.

An assortment of flowering cannabis plants growing in an indoor commercial farm.

Image source: Getty Images.

From a production viewpoint, Cronos gets lost in the crowd

Making matters worse for Cronos Group, it’s a company that mainly ignored production escalation in 2018 and 2019 in favor of calculated moves into the derivatives market. With those acquired products not measuring up to expectations so far, Cronos’ production capabilities have been exposed as below average, at least for its size.

What do I suggest by subpar? Cronos Group repurposed some of this facility to handle processing and research study for higher-margin derivative products.

Suffice it to state that Cronos Group’s meager harvest hasn’t resulted in anything close to operating success.

What’s more, Cronos announced a restatement of its 2019 financials in mid-March, eliminating around $7.6 million Canadian in sales from a currently anemic top-line figure.

Put plainly, Cronos Group’s cash isn’t remotely adequate of a dangling carrot to make this stock a buy.

Sean Williams has no position in any of the stocks mentioned.”>

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