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Innovation Has Cronos (CRON) Looking Ready To Shake Up The Cannabis Industry

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The marijuana business is maturing nicely, but the stocks are still keeping it exciting as we round into the last half of 2018.

Blue chip Maricann (OTC:MRRCF, CA:MARI), for instance, is down 50% this year on news of maybe-shady former director doings. Even though the company is executing its plans perfectly.

Meanwhile, pink sheet Namaste (OTC:NXTTF) has doubled simply for growing sales from fair to modest. Even though its about 17th in revenues among US and Canadian MJ companies.

But there’s one theme investors should watch for long-term success: international expansion. And there are three good companies, Cronos, Tilray, and Canopy Growth that are the best bets to excel in this area.

Cronos

Good news keeps coming out of Cronos (CA:CRON; Nasdaq:CRON). Expansion plans are so ambitious, Cronos is establishing itself as a world leader for marijuana plant genetics. It’s turning that into an international asset, too. So far, it has growth facilities in Canada, Australia, Columbia and Israel. Those are all traditional field or indoor growing facilities. It’s the thing its doing differently that has investors excited.

Cronos is the first grower to announce it’s undertaking a radically different approach to meeting market demand for high quality cannabidiols. Call it the microbrewery model. Cronos is partnering with Gingko Bioworks to produce cannabidiols from genetically engineered strains of yeast.

The experiment, which just might work, would drastically streamline production. Growing whole plants is time consuming and expensive. Fermenting yeast isn’t.

This model has the potential to upend the entire medical marijuana industry, which is becoming radically more sophisticated. A few years ago, the only cannabinoids of interest to most buyers were THC (the one that makes you high) and CBD (cannabidiol, the non-high one use to treat children with seizures and many other ailments).

Those two cannabinoids are predominant in the plant, but others may be even more powerful or better suited to different purposes. The drawback is that CBG, CBN, CBC, CBE, CBT, THCA, THCV and more occur in small amounts making them expensive and difficult to extract in quantity.

One analyst has banged Cronos for its high R&D spending. But that is how this company became the leader in plant genetics. Its spending is on strategic target. The problem here is that investors have gotten ahead of themselves.

Cronos’ market cap is now $2.04 billion. That puts it in the company of industry giants with much greater sales and better cash flow.

This irrational exuberance shows up in its enterprise value muliutples: EV/Rev 34 and EV/EBITDA 174 X.

A few other marijuana companies are just as astronomically priced, throwing the averages off a bit. But the median number for those valuations in the marijuana universe are EV/Rev 25 and EV/EBITDA 34.

So, judged among its peers, Cronos is seriously overvalued. In turn, the whole marijuana sector carries much higher valuations that other growth industries like information technology and computer design.

Many investors are hoping that the strong sales growth, ambitious expansion plans and yeast experiment will make CRON attractive to a buyer. The name Diageo is often whispered.

Chill on that. It could happen for CRON. But a buyout could happen for any of the good marijuana businesses.

We suggest letting the price settle a bit. The share price met resistance around $8 earlier this year. That level should now be its new support. The stock may not go all the way back to that level, but anything under $10 would be a fair price now.

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