Wall Street Upgraded This Popular Pot Stock, but You’d Best Avoid It

The cannabis industry is budding in front of our eyes, and it’s really caught the attention of Wall Street over the past couple of years. While growth estimates tend to vary pretty wildly — which is to be expected of an industry with no legal precedence — the takeaway is that global marijuana sales should soar over the next decade.

For its role, Wall Street has tended to be mostly bullish on what few cannabis stocks have merited coverage. The usual suspects, such as Canopy Growth and Aurora Cannabis, have mostly received buy recommendations from Wall Street, with analysts noting that their superior production and global positioning put both companies in great position to succeed over the long run…

A popular pot stock receives a boost from Wall Street

On the other side of the coin, Wall Street has had little love for Cronos Group (NASDAQ:CRON). Mind you, this is a company that’s one of the most popular among millennial investors, but which has had four separate sell-equivalent ratings issued by Wall Street. However, that changed last week when BMO Capital Markets upgraded Cronos from underperform to a new rating of neutral, although the company’s price target was lowered modestly to 16 Canadian dollars ($12.15 U.S.) from a previous target of CA$17.

Covering analyst Tamy Chen at BMO pointed out in a research note to clients that Cronos Group’s recent 40%-plus decline now has it trading more or less on par with its similarly sized licensed producers — about 13 times estimated 2020 sales.

Though it’s a company I’ve been highly critical of in the past, Cronos Group does have two factors that would seemingly make it attractive to investors.

First, there’s the fact that in mid-March it completed a deal to receive $1.8 billion in cash from tobacco giant Altria in exchange for a 45% non-diluted stake in the company. This cash is transformative for Cronos in that it’ll allow the company to make earnings accretive acquisitions, as well as expand into international markets. Plus, having Altria as an investment partner isn’t too bad, given its prowess for marketing and international expansion. This cash provides Cronos Group with some semblance of downside protection.

The second factor likely to attract investors is Cronos Group’s focus on being a cannabinoid company. Unlike other major growers, Cronos Group isn’t trying to outdo its peers on production. Rather, this is a company that wants to devote its attention to higher-margin derivative sales, such as vapes. Cronos also has a noteworthy deal with Ginkgo Bioworks that could lead to the commercial production of targeted cannabinoids.

Upgrade aside, you shouldn’t have anything to do with Cronos Group

Then again, while Cronos did receive a rare boost from Wall Street, it still doesn’t represent a very attractive investment opportunity — and even Chen partially agrees.

In her research note to clients, Chen also notes that Cronos Group’s production and adult-use sales have lagged its peers. She also points to uncertainties surrounding the supply chain of cannabis products in Canada, especially with derivatives set to hit dispensary shelves in mid-December…

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