Why I Regret Buying Cronos Group Stock

John Kilhefner - finance.yahoo.com Posted 5 years ago
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I admit it: I bought Cronos Group (NASDAQ:CRON) stock for all the wrong reasons.

Why I Regret Buying Cronos Group Stock
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I didn’t buy it because I understood it in a financial sense … I bought it because I saw an opportunity in the marijuana industry.

The top pot stocks were plunging after Aphria (NYSE:APHA) earnings showed growing revenues but dwindling cannabis sales. CRON stock took it the hardest, dropping to a level where many investors (including myself) felt its price was palatable.

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Since then, my position has declined nearly 10%, so I clearly missed the bottom. With Cronos’ earnings report on Thursday, I’m hoping it manages to impress the Street. When it does, I expect I won’t be the only one taking profits. Here’s why I’m getting out of CRON stock:

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Price Targets Are Misleading: Cronos Group stock currently sports a cumulative analyst price target of $21.50 — that’s a 34% increase from its current perch of $16.05. Sounds great, right? Not exactly. Analysts price targets may be a good metric to start with, but that figure can only tell you so much. If you simply go off of the price target and the monster gain it suggests, then things seem pretty good for CRON. But look closer and you’ll see there are only two analyst price targets — $13 and $30. That’s a wide discrepancy. The truth is, CRON has five hold ratings, three sells and only a single buy rating. Even if Cronos beats on earnings, it’s likely more analysts step in to give limited or lowered price targets.

It’s Speculation, Not Investing: Watching Warren Buffett speak has a way of clearing your thoughts. CNBC featured Buffett (and Charlie Munger) on Squawk Box this morning, with the two of them giving their fundamental reasons for buying and selling stocks. One of Buffett’s truisms that sticks with me is that whenever you buy a stock, you should write down the following: “I am buying so-and-so stock because …” If your answer is “because my neighbor is buying it,” then that’s not enough reason for you to own the stock. When I look at my Cronos position, I really don’t like the answer. I was greedy and hoping for a quick short-term boost. I should have bought a company with strong fundamentals and a proven business for the long-term instead.


Cannabis Isn’t the Boom We Expected: Everybody investing in marijuana stocks has to know that they’re speculating. These aren’t investments, they’re gambles. And gambling has a way of messing with your emotions. The fact that CRON stock only brought in $6 million CAD in the past quarter, yet the stock is valued at nearly $6 billion, is a huge red flag. Alcohol companies, such as Constellation Brands’ (NYSE:STZ) massive stake in Canopy Growth (NYSE:CGC), bought into cannabis largely on the expectation legal marijuana would eat into alcohol sales. It hasn’t. In the states where legal marijuana has the strongest foothold, alcohol sales have held steady. When you look at Canada, where national legalization was expected to be the catalyst for billions in sales, cannabis stores are selling less and less pot. In December, cannabis sales totaled $57.3 million CAD ($42.96 million). But by February, cannabis sales had plunged to $49.89 million CAD ($37.38 million).

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Bottom Line on CRON Stock

I was mistaken to think that the decline in marijuana stocks was a buying opportunity. The cannabis downturn represents something much more sinister to the fundamental case for pot stocks. That is, cannabis isn’t going to be the overnight sensation that the talking heads on TV suggested. That’s not to say cannabis won’t be huge. It will be, but it’s going to take a lot of time. And valuations will come down as expectations for the industry are tempered. But if you were to ask most investors the question Buffett posed, I doubt they’d have an answer for you. I know I don’t.

John Kilhefner is the Managing Editor of InvestorPlace.com. As of this writing, he owns shares of Cronos Group stock that he may offload within the next 72 hours.

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