Cronos Group Inc (TSX:CRON)(NASDAQ:CRON) got a big boost this week when it received a vote of confidence from one analyst who put a 12-month price target of $27 on the stock, up from $17 previously. It’s a big change that’s gotten investors excited as well.
Why did Cronos get an upgrade in price?
The driver behind the increase in the price target was a result of comments made by Cronos CEO Mike Gorenstein on Tuesday at the Consumer Analyst Group of New York. He suggested that the company wasn’t too far away from making an entry into the U.S. and that it would be looking to be competitive if CBD were launched there.
The analysts believe that entering the U.S. with a strong partner like Altria could help with its expansion, thereby giving the company a big advantage.
Takeaways for investors
The fact that Cronos wants to enter the U.S. and jump in on the CBD craze there is not a big revelation. Any Canadian cannabis company would likely want to do the same, especially one with the resources of a company like Altria.
Cronos didn’t suddenly change its strategy, introduce a new product or come up with a way to suddenly improve its financials overnight. Instead, its CEO stated something that really didn’t amount to a whole lot, and yet, it was enough for an analyst to jump all over it.
The CEO didn’t offer a timeline as to when the company would enter the U.S., and so it’s an empty claim that really means little today. Unfortunately, much of the hype behind pot stocks has been driven around these vague promises of what the future might hold than of what reality is today.
CEOs have a vested interest in a company performing well and will often try to paint as rosy a picture as possible of its future. For investors, that shouldn’t be a reason to invest in a company. Investors should demand definitive numbers and timelines, not some vague expectations of what the future might hold.
Will the stock climb to $27?
Cronos is a very expensive stock given what it has achieved thus far. With just $6.5 million in its most recent quarter, the company is nowhere near its peers, yet its valuation is significantly higher. The stock is trading well into the triple digits in terms of price-to-sales ratio — an alarming level for any stock.
While I wouldn’t rule out hype pushing the price of the stock up to $27 in the near term, it would only make it that much more overpriced. Investors who buy the stock today are paying for futures and potential that may never be realized, which will create a lot of risk. Even if it were to rise to that level, I wouldn’t expect it to stay there.
The stock is not a good buy at its current price, let alone at $27. Investors would be better off looking at other, more reasonably priced pot stocks to invest in.
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Fool contributor David Jagielski has no position in any of the stocks mentioned.