The Motley Fool

This Pot Stock Is Capitalizing on the Bear Market

Image source: Getty Images.

Every pot stock has been crushed. The marijuana bear market of 2019 sent cannabis ETFs down by more than 50%. The coronavirus bear market of 2020 has compounded the damage.

Pot demand continues to grow. That’s not the issue.

In 2019, the problem was commoditization. Tilray sent the industry into a nosedive last summer when it reported a pricing collapse. Nearly every competitor soon revealed similar pricing pressures. Investors were suddenly comparing rapid revenue growth with a deterioration in profitability.

The biggest concern in 2020 is access to capital. Consider a company like Green Organic Dutchman. The company’s quarterly cash burn rate is several factors larger than its current cash pile. If it can’t sell stock at a reasonable valuation or access debt markets, the entire business could implode.

Stocks have plunged and credit markets are starting to freeze. These factors alone could radically reshape the pot industry.

This pot stock can capitalize

Most stocks are punished when markets plunge. Some stocks go to zero. But not every company gets weaker during a bear market. There’s one pot stock that can grow stronger.

As mentioned, the biggest issues facing cannabis stocks today are commoditization and restricted capital. For Cronos Group Inc (TSX:CRON)(NASDAQ:CRON), those challenges are actually opportunities.

Despite a 75% reduction in market cap since the highs of 2018, Cronos is still valued at $2.6 billion. More important, it has roughly $2 billion in cash and cash equivalents, despite having virtually no debt. You’re almost getting the underlying business for free at current prices.

Cronos is in such an enviable position thanks to its partnership with Altria Group Inc (NYSE:MO), which infused the company with US$1.8 billion in late 2018. This cash will allow the company to continue its growth plans regardless of what happens with credit markets. It also won’t need to dilute shareholders at basement valuations by selling stock.

Most important, Cronos can continue to take market share from struggling competitors. Pot demand will continue to climb through 2030 and beyond. It’s up to existing competitors to capture that growth.

At the moment, Cronos is one of the only firms capable of thinking on a long-term basis. The company can out-invest and outperform nearly every competitor during a downturn. If credit markets seize, Cronos will be licking its chops.

But what about commoditization? Yet again, Cronos takes the lead.

Altria is the ideal partner for a pot stock. The tobacco company controls roughly half the U.S. market with world-renowned brands like Marlboro. Brands are the best way to protect pricing power.

Tobacco is a pure commodity, after all, but Marlboro products are not. You can purchase tobacco from the competition, but you can’t purchase Marlboro cigarettes from them.

Branding is the reason why companies can sell a few cents worth of ingredients for a few dollars.

Today, there are established brands for soda (Coca-Cola), cigarettes (Marlboro), ketchup (Heinz), and nearly any other item. The brands for cannabis, however, are still being created.

Those that can invest for the long-term and leverage the resources of proven brand creators will win. Cronos meets both of those requirements with flying colours.

This Tiny TSX Stock Could Be the Next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.