The First Cannabis Stock to Trade on the Nasdaq
There seem to be a lot of first happening in the cannabis investing space lately. People aren’t even willing to wait 50 days until 4/20 arrives so we can all have a good snicker about how clever their timing was. The first big event to take place last month was the emergence of a cannabis unicorn, MedMen, which is now the first cannabis startup to reach a billion dollar valuation. Before our MBAs had even wrapped up that article, and then wrapped up a proper joint of purple monkey balls to celebrate, a second even bigger event happened.
No, we’re not talking about the High Times IPO but something that’s not entirely dissimilar. A Canadian company called Cronos Group has become the first proper cannabis stock to begin trading on the Nasdaq. We’re not talking about all those boring cannabinoid stocks, but rather an actual marijuana producer that you can now trade without having to open an Interactive Brokers account (though you should still do that anyways). Let’s take a closer look at Cronos Group (NASDAQ:CRON). All numbers below are in USD.
Based out of Canada, “globally diversified and vertically integrated cannabis company“, Cronos Group first came across our radar in an article we wrote way back in December of 2016 titled 11 Marijuana Stocks That Claim To Be Growing Weed. At the time that article was published, Cronos Group was trading on the Canadian exchange (CVE:MJN) and had a market cap of just $167 million. Fast forward to today and we see that the market cap of Cronos Group has exceeded $1.5 billion meaning that investors in the stock would have realized an almost 9X return on their investment. Are we to believe that in the last 1.25 years, Cronos Group has had that much success in the marketplace to merit such an astronomical share price increase? Let’s take a look under the hood.
The first thing to note is that Crono Group clearly states that “the Company does not engage in any U.S. marijuana-related activities“. Any misconceptions about this stock giving investors any exposure to the U.S. marijuana growth story should immediately be dispelled. Investing in this stock will give you exposure to the Canadian marijuana growth story of which there are plenty of other ways to invest, the “safest” being the marijuana ETF we showed you how to buy (TSE:HMMJ). What makes Cronos Group trading on the Nasdaq a big deal is that now U.S. investors don’t need to take the 15 minutes needed to open an account with Interactive Brokers and can instead use any U.S. brokerage firm to buy shares of Cronos on the Nasdaq exchange. So what exactly are you getting when you buy shares of this $1.5 billion company?
Cronos Group is simply a holding company with a number of fully and partially owned interests with the wholly owned interests seen below:
When it comes to the actual numbers, the most recent filing we could find on SEDAR was their interim financial statement for the nine months leading up to September 30, 2017. We would venture to say that only a minuscule number of people who are driving the share price up to the stratosphere have actually read these statements, so it might be news to most that they had just $1.92 million in sales for the first nine months of 2017. While that’s not a whole lot, you’re mainly investing in the promise of future earnings, based on the fact that recreational marijuana is expected to be legalized in Canada. Before we move on to talking about their production capacity, we would note that their investments in “partially owned interests” are listed in the document as follows:
- Whistler Medicinal Marijuana Company – $3.11 million
- Other investments (Hydropothecary, Canopy Growth, AbCann, Evergreen) – $3.73 million
Remember that all the numbers we are giving you have been converted to USD since that’s where the majority of our readers hail from, eh. Now let’s move on to talking about their production capabilities. Here is how they are reflected in the financials:
Note that early this year Cronos Group raised an additional $31.1 million in a private placement that will give a cash pile of about $54.8 million that they plan to spend on continuing to ramp up their growing capabilities. Investors need to pay attention to the pie that’s being carved up behind the scenes as the pieces of pie that have already been carved will get smaller and smaller as the company issues shares like mad to (understandably) take advantage of the rapid share price appreciation:
So from the beginning of 2016 until now, the shares outstanding have more than tripled. That’s worth noting.
It’s at this point that we can go on about the 100 plus acres of land they have, their hundreds of thousands of square feet of capacity, or the licensees they’ve managed to secure, but that’s all reflected in the $61.6 million in assets they have on their books. The question is if this $1.5 billion company can use those assets to create future cash flow streams that merit their current valuation.
One other thing worth mentioning is the international exposure that Cronos offers, in particular, the work they are doing with God’s chosen people as seen below:
In September 2017, the Company announced a strategic joint venture in Israel with Israeli agricultural collective settlement Gan Shmuel (“Gan Shmuel”) for the production, manufacture and distribution of medical cannabis. The Company will hold a 70% stake in each of the nursey and cultivation operations and a 90% stake in each of the manufacturing and distribution operations.
They plan to spend some of the cash they raised in their most recent private placement on developing their Israeli production capabilities which makes us wonder just how they manage to move “product” around? Do you just slap a whole bunch of boxes in a container and ship away hoping for the best? Given that Cronos Group is now selling “product” in Germany, they must have solved the whole “shipping marijuana across the sea to different countries” problem. Cronos has a 5-year exclusive distribution partnership with German pharma company Pohl Boskamp, an international pharmaceutical manufacturer and supplier. (Stay tuned for our future article on medical marijuana in Europe as we already touched on recreational marijuana in Europe.)
Note that we don’t claim to be experts in anything, though we do have an office full of MBAs who claim to be experts in everything. Those MBAs all seem to agree that what we’re seeing in the financials just doesn’t seem to reflect a company with a $1.5 billion market cap. Then when you throw in all the regulatory risk, some stiff competition from a whole slew of other huge growers, it becomes even more difficult to justify the current share price valuation. That’s not even considering that fact that these shares have already appreciate 9X over in less than a year and a half.
If you want to get your hands on some of these shares, stop for a moment and ask yourself why it’s a good idea to invest your hard earned money in probably one of the most risky investment themes out there. Then, after you’ve justified the decision by assuring yourself that the vast majority of your savings are tied up in a prudent, diversified investment strategy, go ahead and open a brokerage account and pull the trigger on what appear to be some extremely overpriced shares. Then smoke some purple monkey balls and check back in a decade or so to find out how big of a mansion you can buy with your newly found windfall. Or not.
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