Cronos: A Compelling Small Cap Cannabis Play

03/20/2019 5:00 am EST

Focus: CANNABIS

Tyler Laundon

Editor, Cabot Small-Cap Confidential

Cronos Group (CRON) was the first Canadian marijuana stock to gain listing on the Nasdaq (others have followed in its footsteps), notes Tyler Laundon, editor of Cabot Small Cap Confidential.

The company is one of the top Canadian marijuana growers serving that country’s legal cannabis market. It has spread its reach through ownership of several smaller operators, each of which maintains its own brand.

Cronos helps with the brand development, growing technologies, capacity and distribution, and it has relationships in overseas markets, including Israel, Germany, Latin America and Australia, to try and spur growth outside of North America.

A joint venture with MedMen (MMNWF), California’s largest cannabis retail chain, is likely to help maintain growth on this continent too. Recent deals with Delfarma (Poland-based pharmaceutical wholesaler) and Cura (oils), plus a capacity expansion project, all serve to help Cronos expand its footprint around the globe.

There is big news on the partnership front too. Shareholders recently approved a U.S. $1.8 billion investment (roughly a 45% stake) from tobacco giant Altria (MO).

It’s no secret that cigarette smoking is on the decline whereas cannabis is on the rise. Altria and Cronos are expected to work together on vaporization technology, pre-rolled cannabis products, product standardization and distribution.

Cronos has been growing quickly. Revenue is up 325% through the first nine months of 2018. That pace of growth reflects the early-stage nature of the company, which has generated just U.S. $10.2 million in revenue over the last nine months.

EPS over the same time frame is U.S. -$0.04. The growth trend illustrates that strategies to grow patient enrollment, begin bulk sales to other Canadian licensed producers, and export overseas, are working well. To pull out just one datapoint, kilograms sold in Q3 2018 were up 213%.

Shares of Cronos mostly moved sideways from mid-March through mid-August 2018. They rallied up to 13.75 last September, then a big retreat took shares back to 6.8. A rebound in the sector, and the Altria news, pushed Cronos back up starting in November, then shares rallied hard off 11 at the beginning of 2019 and ran all the way up to 23 by the end of January.

It’s likely to continue to be a high-profile stock that will be volatile at times, but the long-term potential is certainly compelling. Cronos has a market cap of U.S. $4.2 billion.

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