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Stone Fox Capital Advisors is a registered investment advisor founded in 2010. The firm offers portfolio management with a focus on opportunistic stocks providing secular growth trends at an affordable value. An emphasis is placed on fundamental analysis though charts are used for timing entry and exit points. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA. Invest with Stone Fox Capital's model Net Payout Yields portfolio on IB Asset Management as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here: Follow Mark on twitter: @stonefoxcapital

Cronos (CRON) Stock Isn’t Ready for Prime Time Just Yet

The Q4 quarterly reports for the Canadian cannabis stocks have been highly anticipated.  The results included the first quarter with the legalized adult-use market in Canada leading to substantial revenue gains.

The Cronos Group (CRON) failed to impress the market with their Q4 report. The stock is now down over 10% on the quarterly report where revenues only reached C$5.6 million. The company didn’t aggressively push into the Canadian recreational market and only saw sequential revenues grow by a meager C$1.8 million.

Even the yearly number of C$15.7 million in net revenues really isn’t that impressive, if a quarterly number. A second tier player like HEXO (HEXO) produced over C$16 million in quarterly revenues showing how even smaller industry players were able to rapidly expand with a focus on the recreational-use market in Canada that was legalized starting October 17.

During March, the company closed on the Altria (MO) equity investment that provided Cronos C$2.4 billion in cash. The funds provide for substantial expansion capabilities for a firm already firmly established in global locations like Israel and Australia. The deal even provides for an additional investment via warrants of up to another C$1.4 billion that would give Altria an ~55% ownership position.

The problem for shareholders is that Cronos isn’t a very developed company so far. The operating structure is meager having only spent C$12.4 million on operating expenses during the quarter with a portion of those expenses related to fees from the big Altria investment. For comparison, Canopy (CGC) had operating expenses of ~C$96 million in the quarter that dwarfed the size and scope of Cronos.

Even the Q4 earnings report spent limited time discussing the quarterly operations with a near sole focus on the investments in brands and facilities to facility future growth. The results were nearly an after thought with the provided financial statements focused solely on the yearly results.

Clearly, the management team wants investors to focus n the future. The problem with such a scenario is that the stock valuation sits at nearly $7 billion. A huge gap exists in the presented results and a business worthy of such a large valuation.

In addition, Altria appointed four new board members and a CFO to Cronos. Jerry Barbato was most recently the Senior Director of Corporate Strategy at Altria before becoming the new CFO of Cronos. The move might explain the sparse financial reports that offered no data on the recreation-use results. Either way, all of the new executives, board members and just the cash in general only reached the company at the start of March. The corporate impacts will take several more quarters to be felt including any benefits from the partnership with Altria.

Altria wouldn’t have invested such a massive sum in Cronos unless the company saw a very bright future as consumables and edibles reach the Canadian market later this year and the global markets open up to cannabis in general.

The key investor takeaway is that Cronos just isn’t ready for prime time yet.  The stock has roughly doubled this year from $10 to $20 based on hype that isn’t justified. Altria expects far bigger things from the company, but investors need a lot of patience to be rewarded at the current valuation.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.


Disclosure: No position

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