This Pot Stock Is Capitalizing on the Bear Market

Cronos Group Inc (TSX:CRON)(NASDAQ:CRON) has the backing of Altria Group Inc (NYSE:MO), and that will make all the difference during the downturn.

| More on:
A brown bear sitting on a rock

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 article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Cannabis Stocks

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Why This Little-Known Cannabis Stock Could Double in 2024

This cannabis stock has already doubled this year since 52-week lows and could easily rise that much once more.

Read more »

Bad apple with good apples
Cannabis Stocks

1 TSX Stock I Wouldn’t Touch With a 420-Foot Pole

Down 87% from all-time highs, Cronos Group stock is a still a high-risk investment for long-term shareholders in 2024.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth: Buy, Sell, or Hold?

Canopy Growth (TSX:WEED) stock should make a killing on U.S. expansion, but investors will need to be very patient.

Read more »

Marijuana plant and cannabis oil bottles isolated
Energy Stocks

3 Canadian Value Stocks to Buy Right Now

Undervalued Canadian stocks such as Secure Energy should be part of your shopping list in May 2024.

Read more »

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Here’s Why it’s Not Too Late to Buy Cronos Group Stock

The optimism about U.S. federal marijuana legalization and its anticipation are potent bullish triggers for the Canadian cannabis industry.

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Canopy Growth Stock Is on a Tear: Is it a Good Buy Now? 

Canopy Growth (TSX:WEED) stock surged by 80% from news out of the U.S., but is enough there without the news…

Read more »