Yet again, the optimism toward cannabis stock has spiked, then faded. Cronos Group (NASDAQ:CRON) stock has been no exception.

Both CRON stock and the sector as a whole, as measured by the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), have been on a wild ride. Between Oct. 30 and Feb. 10, MJ more than tripled and CRON nearly did the same. From those February highs, MJ is off 37% and Cronos stock has been nearly halved.

The volatility isn’t new. In fact, it makes some sense.

There’s a push/pull for the sector. Cannabis stocks often rally on hopes for U.S. legalization. It’s not a coincidence, after all, that last year’s rally began just ahead of federal elections, and strengthened as Democrats won the Presidency and, eventually, narrow control of the Senate (Reddit investors added a final, unsustainable flourish to the gains).

Those hopes, however, often run into the reality of the existing Canadian businesses, which remain largely unprofitable amid a supply glut. And so it’s also no coincidence that earnings in February led to a reversal for the group.

With the big pullback, the sector does look more attractive. The long-term trend of cannabis legalization seems unassailable at this point — and in markets far beyond North America. There are several potential plays, but understanding the risks and the rewards, CRON stock still seems like the best choice.

The Big Cannabis Names

That’s not to say that CRON is the only choice. Indeed, investors have plenty of options.

The Canadian operators first sparked investor optimism. But the sector gained broader notice in 2018, when Constellation Brands (NYSE:STZ, NYSE:STZ.B) made a massive $4 billion investment into Canopy Growth (NASDAQ:CGC).

The validation of the industry by one of the world’s largest beer, wine and spirits companies after a smaller investment in 2017 brought cannabis into wider view among investors. Tobacco giant Altria (NYSE:MO) followed by injecting $1.8 billion into Cronos a few months later.

Both Canopy and Cronos retain massive war chests for investments and acquisitions. Canopy in fact recently agreed to acquire Supreme Cannabis (OTCMKTS:SPRWF), although it’s using mostly stock for that deal.

Other companies have gone it alone. Aurora Cannabis (NYSE:ACB) used its stock to make a number of acquisitions worldwide. That strategy hasn’t worked so far, and shareholders have been significantly diluted. But Aurora still has enough assets to make it a high-risk yet high-reward play going forward. The same is true of Sundial Growers (NASDAQ:SNDL), another Reddit favorite that has a turnaround story of its own (though I personally think SNDL stock still needs to get cheaper).

Aphria (NASDAQ:APHA) managed to be more profitable than its rivals. It’s now merging with Tilray (NASDAQ:TLRY), with the two companies looking to the tie-up as a way to cut costs and drive consistent, sustainable, positive free cash flow.

There are U.S. options as well. So-called multi-state operators like Trulieve (OTCMKTS:TCNNF) and Curaleaf (OTCMKTS:CURLF) don’t offer the same international potential, but are growing and profitable. “Picks and shovels” plays like GrowGeneration (NASDAQ:GRWG) and Scotts Miracle-Gro (NYSE:SMG) offer exposure to cannabis growth as well.

The Case for CRON Stock

But of the entire group, I’d still recommend CRON stock. The bull case admittedly isn’t apparent at first glance.

In fact, by the numbers it appears that Cronos is losing.

In 2020, Cronos generated $46.7 million in revenue. Over the same period, Canopy’s sales were more than 10x as high.

Meanwhile, Cronos is running big losses. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss in 2020 was a staggering $147 million — more than 3x sales.

It’s worth considering the context of those numbers, however. Cronos’ sales aren’t low because the company is losing. They’re low because of management’s strategy.

Back in 2019, former chief executive officer (and now chairman) Mike Gorenstein told investors that “our business model is not be the farmer.” As a result, Cronos avoided exposure to the massive oversupply that has dogged the likes of Aurora and Canopy.

The losses, meanwhile, are being driven by investments in vaporizers and, notably, fermentation. Fermentation can create “pot without plants.” Cronos looks like the leader in the field, with commercialization arriving later this year.

Cronos still has about $1.3 billion in cash thanks to the Altria investment, allowing for M&A. And the Altria partnership would be an enormous asset in a legalized U.S. market, given the tobacco company’s existing distribution capabilities.

The numbers are ugly. But CRON stock is a bet on Cronos management and the Altria partnership. With the share price halved, that looks like a bet worth taking.



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