In an effort to carve out a rational perspective on shares of Cronos Group Inc (NASDAQ:CRON), we are going to run through the pros and cons of the stock right now from a tactical perspective. That discussion must begin with the circling sharks of law firms salivating over the potential for forcing class action settlements by the company as a consequence of alleged misstatements about the company’s true scale of business as indicated by its various distribution agreements.

As noted on August 30, 2018, by Andrew Left, managing editor of Citron Research, in a report entitled “Cronos: The Dark Side of The Cannabis Space”, Mr. Left – a somewhat notorious shortseller – noted that “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”, continuing on to state that, “our sources have informed us that it’s because the agreements are so small they could never justify the premium investors are paying for the stock”.

Cronos Group Inc (NASDAQ:CRON), carrying a capital value in the market of $1.88B, casts itself as an investment firm in the biopharmaceutical space, with a strong emphasis on medical marijuana and cannabis-related research and products. In short, the company seeks to invest in other companies, either licensed or actively seeking a license, to produce medical marijuana pursuant to Canada’s Marijuana for Medical Purposes Regulations (MMPR).

The firm typically invests in companies based in Canada. The firm is primarily an equity investor, may also advance debt as appropriate. It seeks to make minority investments with appropriate governance and shareholder rights. The firm seeks board representation consistent with the size of the investment, but does not need control.

Cronos Group Inc. was incorporated in January 2013 and is based in Toronto, Canada with an additional office in in Toronto, Canada.

According to company materials, “Cronos Group is a globally diversified and vertically integrated cannabis company with a presence across four continents. The Company operates two wholly-owned Canadian licensed producers regulated under Health Canada’s Access to Cannabis for Medical Purposes Regulations: Peace Naturals Project Inc., which was the first non-incumbent medical cannabis license granted by Health Canada, and Original BC Ltd., which is based in the Okanagan Valley, British Columbia. The Company has multiple international production and distribution platforms including in Germany, Poland, Israel and Australia. The Company intends to continue to rapidly expand its global footprint as it focuses on building an international iconic brand portfolio and develop disruptive intellectual property. Cronos Group is committed to building industry leading companies that transform the perception of cannabis and responsibly elevate the consumer experience.”

Showdown

As noted above, to get a proper perspective on CRON shares right now, you have to take the stock in the context of its current “scandal”, which is defined by allegations of misrepresentation in terms of its current distribution scale based on its agreements.

The sharks are certainly circling, with about 50 different firms drooling over the chance to score on the company’s misfortune.

However, the stock is in a high-momentum market space. After all, shares of CRON were up over 100% in just a few weeks before this allegation. What’s more, that suggests there is likely far more short interest here than in other major plays in the cannabis space.

That’s an explosive combination – short interest and a market enculturation of momentum. It often leads to stocks achieving seemingly unjustified levels of success that are nonetheless banked with pleasure by exposed bulls. Markets aren’t about justice. They are about risk. And, despite wherever the magic value level may be for CRON, shorts may find themselves suddenly aware of risk again if the CRON bulls can muster another push in the face of the current scenario.

CRON has a significant war chest ($89.6M) of cash on the books, which is balanced by virtually no total current liabilities. CRON is pulling in trailing 12-month revenues of $6.6M. In addition, the company is seeing major top-line growth, with y/y quarterly revenues growing at 19.5%.

This is an exciting story, and we look forward to a follow-up chapter as events transpire.