Cronos Group Plummets After Citron Calls It The 'Dark Side Of Cannabis'

Citron Research, which is known for its short theses, released a new report Thursday targeting red-hot cannabis stock Cronos Group Inc CRON.

Background

Prior to Citron’s report, Cronos stock had skyrocketed 56.1 percent in the past week. The bullish momentum in the cannabis space comes after after Novia Scotia Liquor Corporation named Cronos and a number of other marijuana companies as its major suppliers last Friday.

In June, Canada legalized recreational cannabis use nationwide, and the launch of the adult-use marijuana market is coming on Oct. 17. Investors see Canadian legalization as a major growth opportunity. A revenue beat from Tilray Inc TLRY on Tuesday gave the marijuana sector another boost.

Cronos ‘Reality Check’

Citron's Andrew Left, who is skeptical of marijuana stocks in general, accused Cronos management of deceiving investors.

“Cronos 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,” Left wrote.

He claims Cronos’ agreements are so small that they wouldn’t even come close to justifying the huge gains in the company’s market cap. In addition, Left said Cronos lags its Canadian cannabis peers in sales, trades at a steep premium to Canopy Growth Corp CGC (which has a beverage deal in place), has a history of product recalls, has no U.S. business and is spending practically nothing on research and development.

“When looking at Cronos relative to other cannabis stocks that have yet to receive a ‘beverage deal,’ Cronos’ sky high valuation looks completely out of whack with fundamentals,” Left said.

LAST WEEK when $TLRY was $26 Citron recco with a $45 tgt. We are taking profits here. 70% in a week. Stock moved too much too fast compared to peers. Here is a chart of price per Kilogram for Canada consumption. At these prices better weed buys out there. pic.twitter.com/9IymvcLVUU

— Citron Research (@CitronResearch) August 24, 2018

Brochstein’s Take

New Cannabis Ventures founding partner and author of the 420 Investor Alan Brochstein told Benzinga Left is being too critical of Cronos.

“There is no ‘deception’ in my view,” Brochstein said. “BC asked that the suppliers not reveal the size[of their distribution agreements], though some did.”

However, Brochstein said Cronos, Tilray, Canopy and other marijuana stocks could be due for a pullback after their recent run.

“I think [Left] is off-base in a lot of his attack, though the stock does seem awfully expensive to me,” Brochstein said.

Left said Cronos should be valued in-line with comparable cannabis company OrganiGram Holdings Inc OGRMF, which suggests a $3.50 price target (roughly 70 percent downside) for Cronos stock.

At time of publication, Cronos was trading down about 18 percent to $9.70.

Related Links:

Tilray's First Earnings Print Gives Cannabis Stocks Another Boost

Everything You Need To Know From The Cannabis Capital Conference