Yesterday, shares of the Canadian marijuana investment firm Cronos Group (NASDAQ:CRON)took an absolute beating. During normal trading hours, the company’s stock fell by over 28%, and then it slipped another 6.9% in after-hours trading. What in the world happened?
Cronos’ shares cratered yesterday for three separate reasons:
- Citron Research’s Andrew Left kicked off the downtrend by saying that Cronos is “deceiving the investing public” about its supply agreements with Canadian provinces and that its international footprint isn’t as large as some of its chief competitors. As a result, the company might not be an ideal partner for U.K.-based beverage maker Diageo (NYSE:DEO). Diageo has been rumored to be engaging in talks with a handful of Canadian pot companies regarding a possible equity stake, according to BNN Bloomberg.
- News slipped out yesterday that President Trump has reportedly formed a secret committee to downplay the health benefits of marijuana. This unexpected development seems to pour cold water on the notion that Trump might move to legalize marijuana at the federal level or, at the very least, make it a states’ rights issue as promised on multiple occasions.
- Lastly, Cronos and nearly all of its large-cap marijuana peers have seen their shares prices tear higher over the last two weeks in anticipation of the upcoming legalization of recreational marijuana in Canada this October. In short, this widespread rally was probably ripe for a pullback.
With all of these headwinds, Cronos’ stock might be set to take another leg lower in the coming days. However, investors with a long-term outlook for this high-growth industry might want to take advantage of this dip. Here’s why…
Cronos will be a long-term winner
Admittedly, this surge in the share prices of the top Canadian marijuana companies like Cronos, Canopy Growth Corporation (NYSE:CGC), and Tilray (NASDAQ:TLRY) is probably overdone at this point. After all, Canopy’s shares are presently trading at a mind-numbing price-to-sales ratio of 147, and Tilray’s stock is currently valued at something like 10 times the company’s projected 2021 sales. Cronos, for its part, is arguably the worst of the bunch with its shares trading at a staggering P/S ratio of 231 — even after yesterday’s monstrous decline.
Still, investors may want to start buying Cronos’ stock on this steep pullback for two reasons. First off, big beverage makers like Diageo are undeniably showing strong interest in this nascent industry. Consequently, more multibillion-dollar deals like the recent tie-up between Canopy Growth Corp. and Constellation Brands (NYSE:STZ) are probably close at hand…
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