For a number of years now, I’ve witnessed the same scenario replay itself. Cannabis stocks sag during the summer and shake out the weak hands, only to stage a spectacular comeback later in the year. As the summer malaise comes to an end, I’m looking forward to watching the sector’s revival — and I’m viewing Cronos (NASDAQ:CRON) stock as a perfect representative of the cannabis market’s incredible potential.
To be sure, not everybody shares my opinion on Cronos stock — but then, as a lifelong contrarian I’m accustomed to holding unpopular opinions. In any case, if analyst bearishness drives the price down, I view this an opportunity to buy more CRON stock, not an excuse to panic, sell and end up regretting it after the irrational market fear passes.
CBD Acquisition Will Drive Growth for CRON Stock
Even though Cronos is a Canadian company, they’re making what I believe to be a very savvy move — entering into the United States CBD market. In a $300 million headline-grabbing deal, Cronos agreed to acquire hemp producer Redwood Holding Group, a company with a firm foothold in the market and robust sales in body lotion, bath sales and other CBD-infused products. The deal is expected to close in the third quarter of this year and it’s a bold, but smart move into the $1 billion American CBD market.
When Cronos promised to enter into the CBD industry in the U.S., some analysts were skeptical. But the Redwood acquisition demonstrates that the company is prepared to put its money where its mouth is. Indeed, Cronos CEO Mike Gorenstein was effusive with praise for Redwood’s founders, Robert Rosenheck and Cindy Capobianco:
Rob and Cindy have built a differentiated, best-in-class platform with hemp-based CBD formulations that stand for quality and consistency. Our goal is to preserve the integrity of all Rob and Cindy have created, while also learning from them and leveraging Cronos Group’s resources to capitalize on the significant demand for skincare and other consumer products derived from hemp.
It’s been said that the CBD market in the United States will be worth $16 billion by the year 2025. I, for one, don’t believe that it will take that long for investors in CRON stock to see the company’s foray into CBD bear fruit and positively impact the share price.
Ignore the Analyst FUD and Check the Facts
Ryan Tomkins, an analyst with financial firm Jefferies, isn’t particularly impressed with Cronos’ move into American CBD. His FUD (fear, uncertainty and doubt) is driven by his belief that CRON stock is expensive compared to other stocks in the cannabis sector. Consequently, Tomkins has slapped CRON with an underperform rating and a price objective of $15 CAD for the stock’s Canadian version. This suggests an approximate decline of 20% from the current share price.
Personally, I almost find this assessment laughable. Looking over the 52-week price range for the U.S. version of Cronos Group stock, it has been as high as $25.10 and has corrected to about half of that price — a similar scenario to what’s happened to the Canadian cannabis sector as a whole. Tomkins himself admits that Cronos is acquiring a high-end brand in Redwood Holding Group. Besides, I have no doubt that the company will easily recoup their $300 million investment in Redwood and will soon start to see outstanding revenues as the broader CBD market grows in leaps and bounds throughout 2019 and 2020.
Moreover, let us not forget that Cronos Group’s second-quarter earnings report revealed a tripling of the company’s net revenues compared to the same quarter in the previous year. To be specific, the reported amount for the second quarter of 2019 was $10.2 million CAD. It’s yet another example of how a forward-thinking company can make the analysts look foolish by sticking to its vision and focusing on growth.
Here's my takeaway on Cronos Group Stock…