Well-known short seller Citron Research is at it again, and this time the vicious attack is on the first-ever U.S.-listed cannabis producer Cronos Group (TSX: CRON)(NASDAQ: CRON), sparking a sell-off by jittery investors in the stock that wiped away 28% off the marijuana producer’s market value in one trading day on Thursday.
The famous alarmist researcher shook investor confidence in the cannabis firm, especially with his assertion that there is “great deception in process” at Cronos, claiming management “appears to have been deceiving the investing public by purposely not disclosing the size of its distribution agreements with provinces — unlike every other major cannabis player.”
Citron is referring to volumes in provincial supply agreements for the upcoming recreational market.
I don’t know why Cronos management chose not to reveal the finer details that Andrew Left is furious about, but this accusation makes many other major cannabis players “guilty” of the same accusation.
Who else is guilty?
I covered provincial supply agreements, comparing Aurora Cannabis (TSX: ACB) with leader Canopy Growth (TSX: WEED)(NYSE:CGC) recently, and noted that the prevalence of missing information makes valuation on the rounds of provincial supply agreement deal numbers a futile exercise.
Canopy’s target acquisition Hiku Brands did not disclose volumes in its British Columbia deal. Aurora’s subsidiary MedReleaf kept mum on the size of its deals in Alberta and British Columbia.
Tilray (NASDAQ: TLRY) hasn’t given deal numbers for the British Columbia deal, like Aphria and Canopy did.
I would excuse Tilray on the basis that it mentioned it “will negotiate a definitive agreement to supply the B.C. market with a variety of new and established cannabis brands and products once adult-use cannabis legalization takes effect,” but this statement could mean that the company intends to expand its deal in B.C. at a later stage, while not revealing the current deal size (assuming the announced deal had some volume mentioned in it).
Citron used Canopy and Tilray as examples of better disclosure quality, but if the latter’s B.C. deal had any volumes specified, it could become guilty too.
Aurora didn’t disclose its deal with B.C., probably for the reason that it was too small to be “that material.”
Most interesting, of the 13 successful adult use cannabis suppliers to Alberta, only four LPs prominently released deal sizes, namely Canopy, Aurora, Aphria, and Maricann.
Maricann had to make a second press release on the Alberta deal to give volume details after the first announcement had omitted this information, while CannTrust aggregated its deal volumes for three provinces to 17,000 kilograms annually in its press release on July 13.
It seems like most Canadian LPs are comfortable releasing figures from big deals only.
Aphria, Canopy, and Tilray have been forthcoming as far as deal-size announcements were concerned, and I will be interested in watching how many LPs will fully disclose Ontario deal sizes once the province makes that information available.
Given this background, it’s tricky to punish Cronos individually for an “offence” several other LPs have “committed,” especially when there is no set disclosure standard on such deals.
Germany revenue performance
Citron was critical of Cronos’s sales underperformance in Germany, as the firm signed a significant supply deal with Pohl-Boskamp last year that gave its access to 12,000 pharmacies in the territory. This is an interesting observation, but the Citron-cited leafly.com article on a 2017 product recall was nowhere to be found (probably removed).
That said, Tilray’s latest financial results do not outline Germany sales but highlight exports to South Africa, Argentina, and the United Kingdom; total export sales were US$345,000 for the quarter, yet Tilray signed a much bigger deal with NOWEDA just about the same time as Cronos, giving Tilray access to 16,000 Germany pharmacies.
Canopy and Aurora have shown sustained revenue performance in Germany lately.
Investor takeaway
If investors should dump Cronos shares because of non-disclosure of deal numbers, then, by extension, they have to dump several other cannabis stocks for the same “punishable offence” too.
If that’s too hard to justify, then Cronos Group stock could recover some lost value over time. Actually, at the time of writing on Friday, the shares were up 10% on the TSX, but overvaluation concerns on cannabis stocks are very real and the risk of falling on any bad news is astronomical.
Invest with care.
