Don’t Get Trapped by All the Hype Surrounding Cronos Stock

This past week’s downgrade of Cronos Group (NASDAQ:CRON) rekindled an overdue discussion about the real value of CRON stock and pot stocks more broadly.

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Source: Shutterstock GMP Securities analyst Martin Landry lowered the firm’s stance on Cronos Group stock from “Buy,” to “Hold,” not because he feels the company has hit a wall, but because CRON stock appears to have rallied too far, too fast.

While not his direct intention, Landry’s comments also assured less-daring investors missing out on cannabis-mania that their doubts weren’t entirely unmerited.

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More important, the marijuana craze has still lured a huge number of unsuspecting traders into a trap. The only thing really keeping these names propped up right now is hype, but hype can fade fast, and without warning.

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Cronos Stock and the Big Run

Landry’s exact words:

“The company’s shares have surged ~110% year-to-date on no material news and have outperformed the HMMJ cannabis index by a factor of 2. This strong performance forces us to change our rating to HOLD solely based on valuation.”

The GMP Securities analyst further fleshed out that Cronos is still well-positioned to capture a respectable piece of a very real but budding marijuana market. The time Cronos needs to fully figure out where it fits in an ever-changing market, however, could prove turbulent for Cronos stock.

Landry went on to caution investors:

“Cronos is still in the early stage of its development with limited revenues in relation to its sizable market cap. Hence, in our view, the company needs to backfill its valuation with capital deployment into the U.S. market, increase its penetration in the Canadian recreational market and continue its international expansion.”

It was a well-reasoned, common-sense observation and too many traders would have none of it.

That dynamic has been in place for months, largely starting on the heels of news that Constellation Brands (NYSE:STZ) had made a major investment in Canopy Growth (NYSE:CGC).

Shortly thereafter, Altria Group (NYSE:MO) bought $2 billion worth of Cronos stock, solidifying the idea that not only did cannabis have a bright future, but a wave of deal-making and outright acquisitions was imminent.

That wave isn’t quite as imminent as some have been hoping. Despite the overly-aggressive pushback against his point, that’s all Landry was really trying to say.

The Hype Feels Real

For the relatively small but highly vocal horde of investors who not only bought heavily into Cronos, but bought into the very premise of the cannabis movement itself, it is tough news to hear.

They’re not wrong to be optimistic; the marijuana legalization movement is steam-rolling its way across the world.

Their expectations and timeframes, however, are uncomfortably aggressive.

We’ve seen it happen before. Think back to 2013. That was the rise of the affordable (sort of) 3D printers, which were supposed to revolutionize small-scale manufacturing. And they did, to some degree. Investors who bought into the idea of the craze at the time were severely punished though.

3D Systems (NYSE:DDD), a poster child of the 3D printing revolution unfurling at the time, soared from $12 per share near the beginning of 2012 to a peak of more than $80 in 2013. By late-2015, it was back under $9 per share, with 3D printers never living up to their full hype.

Another proverbial failure-to-launch: The 2012 race between Arena Pharmaceuticals (NASDAQ:ARNA) and Orexigen Therapeutics (OTCMKTS:OREXQ) to introduce the first FDA-approved weight-loss drug to the U.S. market in thirteen years.

Both stocks soared on their respective prospects, but neither stock has ever been priced as high as they were right around the times of their approvals. Neither drug has met lofty sales expectations being batted around them. Orexigen, in fact, has since declared bankruptcy.