Cronos – Time to Buy Cannabis?

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Trump tweets, trade wars, and geo-political uncertainties have lowed sentiment across stock markets lowering all ships in the harbor.


Trump tweets, trade wars, and geo-political uncertainties have lowed sentiment across stock markets lowering all ships in the harbor.  However many stocks are non-cyclical and several sectors are still poised for growth regardless of what happens.  One sector we particularly sector that has no ties to China, and is likely to remain strong even during a recession is the cannabis sector.

There are several companies we follow but one recently was upgraded by Bank of America providing that catalyst to break out of its bearish trend.  With more states looking at decriminalizing, legalizing and use for medical purposes it is only time before the Federal Government pushes for reform.


The engulfing candle at an important support level is an early indicator of a likely reversal, especially based on the broader time frame.  Though Bank of America has a $20 target price, due to sentiment in the space, and bullish momentum since last year, it would not be unreasonable to hit our 25.50 target over the next 6-9 months.

The partnership with Altria (parent company of Marlboro Cigarettes) not only provides a partnership with a company that has access to broader markets, but also provides Cronos with a nice pile of cash to do acquisitions and continue to grow in size.

There are several ways to play Cronos here, the simplest is just buying the stock outright and removing some risk capital at the 20.0 and 25.0 levels keeping the remaining shares with no capital exposure.  The other method is to sell PUTs a couple weeks out, with the intent of the shares being assigned, and providing a potentially better entry price.  If Cronos rallies, you keep the premium which can be used to buy the shares outright at no risk.

We will likely do a combination of buying the stock outright and selling some at the money PUTs a few weeks out, with the intent of having the additional shares assigned, or if expiring OTM, reducing our existing per share cost.



The Risks

We also want to be painfully clear on the risks of investing in Cannabis stocks.  Though there is much hype, eventual deregulation will lead to more participants entering the market such as farmers.   If adopted nationally cannabis will become a commodity like corn, soybeans and cotton, and as farmers rotate into the more profitable hemp and cannabis sector, prices are sure to come down.

We already see this in States that have legalized Marijuana such as Colorado, California and Oregon, where Cannabis shops have sprouted everywhere. Pun intended.  This will surely lead to consolidation in the space, so it is important to look at companies that have strong partnerships, or are unique to the industry.

Don’t think for a minute that Johnny Farmer can’t grow top quality Cannabis or Hemp plants.


Our goal with Cannabis stocks is to build a small portfolio with low or no risk.  Often investors ride the wave up, and then right back down again.  No different than Bitcoin where many did not take profits at or near the ATH’s.  It is important in these types of markets to remove capital when you can, not when you have to.

There will surely be some winners and losers, so we are sticking with the companies that have First Mover Advantage, capital for reinvestment or provide something unique.  Cronos has FMA and capital for growth making it one of the Cannabis companies on our radar for the broader term.


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