Has Cronos (CRON) Stock Gone Too Far?

Wall Street investment firm Jefferies believes that post-Altria (MO) deal Cronos (CRON) stock has gotten ahead of itself.

Jefferies analyst Owen Bennett has initiated coverage on the stock with an Underperform rating, akin to a sell.  Bennett issued coverage on multiple pot stocks at the beginning of the week. The call for Cronos was a standout as the analyst believes the stock has exceeded expectations for what can be achieved by the company relative to the partnership with Altria. (To watch Bennett's track record, click here)

While the initial news of the Altria deal saw a spike higher, the stock sold off immediately afterwards only to the proceed on a seemingly one-way, unabated move upward:

Is Cronos Really a Sell?

There are two main concerns that Bennett points out in his newly released company coverage.

The first concern is that outside of the initial excitement of the Altria deal there lacks an investment opportunity at present for the company to utilize the capital it has acquired through the deal.  The analyst believes that Cronos is still well situated with their current investments.  The deal’s ink may still be too fresh for the company to have come up with a concrete plan as of yet.  This under-utilized capital would be a drag on the company’s potential and their stock price.

Going hand-in-hand with the first concern, the second concern that Bennett points out is that there does not appear to be an appetite to put the money to work.  But, as I mentioned, the deal is still fresh and the perspective of the executives may still be shifting.

What a lot of cannabis companies have been doing after a mega-deal is expanding their footprint worldwide.  For instance, Canopy Growth with their $4 billion investment from Constellation Brands, acquired multiple companies outside of Canada as well as retail companies in Canada to provide a platform for sales and expansion.  This may be a wise strategy for Cronos.  However, as Bennett points out, the company has not made any concrete indications that is an avenue they will be taking.

The deal has yet to finalize so it may be that Bennett is early on this call.  Also, the new Farm Bill that was recently signed into law by President Trump allows for broader legalization of hemp and CBD products throughout the United States under federal laws.  The groundwork for this legalization is just being laid out and Cronos may be considering a wise movement into the United States market.

There is one important aspect of the first coverage that needs to pointed out.  The price target used in the analysis is for the Canadian market.  To keep in perspective, at the time of this writing, the Canadian stock is trading at just under C$28.00.  The NYSE equivalent is just below $21.00 (Due to currency exchange rates).  The Price Target (PT) for Cronos is C$17.00.  Bennett also believes the downside potential could be C$10.00; that is below the pre-deal stock price.  From an upside potential, the analyst also believes the stock could perform, long-term, to C$38.00.

The cannabis industry is still quite new with varying forms of legalization occurring nearly daily.  The Altria/Cronos deal is even newer than that with being printed in the past few months’ time; just in December.  Time will tell what direction Cronos takes.  But, as time goes by, the company creates an opportunity cost for investors with inaction.  Look for news releases in the coming months to get a sense of how Cronos will utilize their newly gained investment capital.