Charts Indicate That the Risk/Reward Ratio of Cronos Stock Is Reasonable

Cronos (NASDAQ:CRON) stock dropped almost 10% on Thursday after the company’s fiscal first-quarter results were released. For those who regularly trade CRON stock, the decline was not surprising. Nor was the bounce of CRON stock on Friday. CRON stock remains locked in a downtrend.

Is now the time for long-term bulls to buy Cronos stock? Down over 50% from its highs, one would think the stock could rise above its current levels, while others may think it’s the start of an even larger correction. On the plus side, the risk/reward scenario of Cronos Group stock could become favorable soon.

Before we look at the charts though, remember that Cronos stock is a speculative investment. Personally, I prefer buying names like Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) on deep pullbacks. That said, some think that CRON stock has potential, so let’s take a look.

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Trading CRON Stock

It’s clear that $24-$25 is resistance on the chart, while CRON stock is locked in a violent downtrend. Even a rally up to $16 might just result in additional selling pressure. The 21-day moving average is around the same area as its downtrend resistance, so I would expect CRON stock to fail to hold that level.

That said, the technical outlook of Cronos stock looks promising at its current levels.  Throughout the third and fourth quarters of 2018, $13 -$14 was resistance for CRON stock. After breaking through this level in January, many investors will expect it to act as support.

It helps that the downtrend support of Cronos Group stock  is coming into the picture around current levels and that the 200-day moving average sits at $13.28. If CRON falls below the 200-day, the shares could reach $12  and single-digits after that.

But let’s not get ahead of our skis here. See if CRON stock can stay above its nearby support. A bounce could send it higher by more than 14% to its current resistance. If it breaks below the support level,  investors should wait for a more favorable price.

The Bottom Line on Cronos Group Stock

(Note: the below figures are in Canadian dollars)

In Q1, CRON churned out a GAAP profit of 42 cents on revenue that grew 120% year-over-year (YoY). Here’s the thing though: it reported just $6.5 million of revenue. That’s right; this  company, with a $4.5 billion market cap, registered sales of just $6.5 million in Q1.

Its top line more than doubled from the same period a year ago, but at what point is its valuation a bit ridiculous? Analysts  do expect its rapid growth to continue for the rest of this year. In Q2, they, on average,are calling for $6.76 million of sales, up 160% YoY. In Q3 and Q4, the consensus estimates ramp dramatically to $13 million and $22.9 million, up 360% and 334% YoY, respectively.

But based on those estimates, CRON stock is valued at roughly 90 times its 2019 sales. That’s a tough pill to swallow.

That said, there’s demand for this stock and many others like it. Constellation Brands (NYSE:STZ) has taken a massive stake in CGC, while Aurora Cannabis has talked about a collaboration with Coca-Cola (NYSE:KO). Cronos Group stock received a $1.8 billion investment from Altria (NYSE:MO) in exchange for a 45% stake.

The point is that many investors — from retail to conglomerates in the tobacco and alcohol industry — view the cannabis industry as a rising, long-term play. Getting in now is costly, but those who are patient are essentially guaranteed a seat at the table. The question is how valuable that seat will be worth and how long it will take to realize its potential. It’s clear there is a non-cyclical trend toward cannabis and cannabis-related products and for that reason, a speculative position  may make sense for some investors. But don’t forget, it is speculative.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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