Cronos Group Inc (NASDAQ:CRON) is facing its biggest test yet after rallying by more than 70% in August. The company has come under immense scrutiny after a research note by Citron Research questioned the company’s failure to disclose the size of its agreements with various Canadian companies.
A bearish call by the research firm shook the market and in the process triggered a 20% plus the decline of Cronos Group from this year highs of $13.39 a share. While the stock is still engulfed’ in a long-term uptrend, a steep pullback appears to have caught many investors by surprise.
After the recent sell-off, the stock faces immediate support at the $11 a share handle, below which it could drop to the $9 a share mark, seen as the next support level. After the recent pullback, the stock needs to rise and stabilize above the $12 a share mark, to have any chance of climbing high.
About Cronos Group
Cronos Group is a diversified and vertically integrated cannabis company with operations spanning four continents. Through it’s two wholly owned subsidiaries, the company pursues opportunities in the regulated medical marijuana market. The company also boasts of multiple international production and distribution platforms.
Why is Cronos Group Surging?
Cronos Group enjoyed one of the finest runs in August depicted by a 50% plus surge. Investors continued to push the stock up the charts on taking note of the opportunities that could come into play on the adult use marijuana market coming online in October.
The stock also spiked on reports it might be an acquisition or investment target for alcoholic beverage companies looking to jump into the legal Canadian pot market. Being the seventh largest company on production capacity the company is seen as an attractive investment target that could attract deals from the likes of Diageo plc (ADR) (NYSE:DEO).
The stock’s sentiments in the market also received a boost on the company entering a joint venture with Colombia’s leading agricultural service provider, Agro idea SAS (“AGI”). The two have agreed to establish a joint venture tasked with the responsibility of developing, cultivating, manufacturing and exporting cannabis-based medicinal products for the Latin and Global markets.
“By leveraging AGI’s expertise and Cronos Group’s cannabis know-how, Nature will enable Cronos Group to create a cultivation and manufacturing hub in Latin America for our global distribution channels in a manner that minimizes region-specific and execution risk,” said Mike Gorenstein, CEO of Cronos Group.
Cronos Group has followed the Colombian partnership with yet another deal this time with Ginkgo Bio works for the production of cultured Cannabinoids. Ginkgo has agreed to merge its platform technology to complement Cronos technologies in the production of full spectrum cannabinoids.
Cronos Group winning streak is at risk of coming to an end on investors taking note of serious claims raised by short selling brokerage firm Citron Research. The firm has already initiated coverage of the stock with a bearish call and set its price target at $3.50 a share. The price target is 70% below the stock recent share price of $11.
The firm on its research note raises serious concerns as to whether investors might have overreacted on the opportunity at stake with the adult use marijuana market. The fact that there are over 100 companies in the legal cannabis landscape essentially means companies will have to outdo each other to reap the full benefits of the expanded target market.
“Although the hype is big and the prohibition after 100 years is real, it is critical to understand that in the Canadian landscape, there are over 100 licensed producers and there will ultimately be more losers than winners,” the Citron analysts wrote.
The research firm also alleges that the company has been deceiving investors by not disclosing the size of distribution agreements signed with provinces in Canada.
GMP Securities analyst Martin Landry has sought to downplay the remarks by reiterating that Canadian provinces are yet to make fixed commitments that would justify full disclosure.
What Next For Cronos Group
Even though Citron research has raised serious concerns about the catalysts driving Cronos Group, the stock has remained resilient in the market. Short sellers have continued to be crushed as pullbacks have acted as buy opportunities from where the stock has continued to trade higher.
While the stock looks set to continue powering high, it may be wise to wait for pullbacks to enter long positions, given that the stock is currently trading close to 52-weeks highs of 13.39 a share.
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Disclosure: We have no position in CRON and have not been compensated for this article.