The marijuana industry, and once again marijuana stocks, are blazing hot. Following the end to nine decades of recreational marijuana prohibition in Canada this past October, the red carpet has been rolled out for what’s now a legitimate business model. Sales in Canada could easily top $5 billion annually by the early part of the next decade, with global sales expected to more than double from $12.8 billion in 2018 to $31.3 billion by 2022, according to a report from Arcview Market Research and BDS Analytics.
As you might imagine, this expectation of rapid sales growth, and the eventual forecast of strong profitability, is what’s responsible for sending pot stock valuations into the stratosphere. Following an abysmal fourth quarter, 15 marijuana stocks ended the month of January higher by at least 50%.
While this industry appears as if it can do no wrong, there are a handful of exceptionally popular pot stocks that you simply couldn’t pay me to buy…
This probably comes as no surprise given that I recently referred to Cronos Group(NASDAQ:CRON) as the most overvalued marijuana stock, but I wouldn’t buy into the company here even if I were given free money to do so.
The primary reason Cronos Group has essentially doubled in less than two months is because tobacco behemoth Altria (NYSE:MO) agreed to take a $1.8 billion equity stake in the company in December. Upon closing of the deal, the shares issued to Altria in exchange for this capital will give the tobacco producer a 45% stake in Cronos, with the possibility of upping its equity stake to 55% with the warrants it’ll also be receiving. This marks the second major equity investment in the marijuana industry, and offers hope that Altria may wind up fully acquiring Cronos Group if its traditional tobacco volumes continue to fall. But even if Altria doesn’t purchase the remainder of Cronos Group that it doesn’t already own, Cronos will be left with north of $1.8 billion in cash to execute its long-term strategy.
While not oblivious to its envious cash position, it’s the company’s valuation relative to its strategy that has me baffled. At its peak, Cronos Group is on track to produce around 120,000 kilograms a year, which includes 70,000 kilos from its joint venture and 40,000 kilos from Peace Naturals. What’s a real head-scratcher is that you can buy Canadian growers with, say, 100,000 kilos to 113,000 kilos in peak annual production with market caps of as low as $670 million — i.e., basically a fifth of Cronos’ existing market cap.
There’s also been a lot of emphasis on international expansion, since domestic Canadian demand may only hit roughly 1 million kilos a year. With most of Cronos’ larger peers focusing abroad, Cronos has only managed to really lay its footprint in Israel and Australia. In other words, it’s really lagging its peers in terms of forging international sales channels.
Take away the $1.8 billion investment from Altria (which still hasn’t closed), and add on a forward P/E ratio of more than…
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