(via ZEXPR) Recently, the cannabis sector has gained momentum owing to a certain change in circumstances. The industry’s benchmark Horizons Marijuana Life Sciences ETF is up by 105.6% ever since November 2. Once you compare that with the 18.9% gains of the S&P 500 index, you will see a substantial difference.

This comes right after several states in the U.S. voted in favour of the legalization of recreational and medical marijuana in the November elections.

With the Democratic Party controlling all three branches of the U.S. government, it seems like they will bring in a friendlier attitude towards the cannabis market. However, with there being plenty of excellent marijuana stocks to consider purchasing, there are a few you should avoid.

RichmondSuper analyst Richard Walton designates Cronos Group (CRON) in the latter category and explores the reasons why this stock is so not worth your hard-earned money.

Unstable Financials

Now, while you may presume the Cronos Group to be a promising cannabis stock investment owing to the recent investor enthusiasm around it, you need to take a closer look at the situation.

The pot grower’s partnership with Altria allowed the tobacco giant to acquire a 45% stake in it which amounts to almost $2.4 billion Canadian dollars. Both companies closed the deal in March 2019.

The reason this deal was so monumental for Cronos Group was that cannabis companies have for long struggled to land nondilutive ways to raise capital.

Unfortunately, things have not been uphill for this marijuana player ever since the deal as it continues to record disappointing financial results. The fourth quarter of 2020 (ended Dec 20) did not prove to be any different once the reports came in.

RichmondSuper analyst Richard Walton assesses the current price rate per share of the stock which stands at $9.16 with a market cap of $3.3 billion and predicts it as a possible value trap. Once you evaluate the recent reports of the company, you might find yourself getting a little apprehensive from investing.

Walton further warns against investing in companies with low financial strength as that would inevitably result in permanent capital loss.

Not The Market Leader

Cronos Group reported revenue of $17 million Canadian Dollars during the quarter which represented its 133% year over year jump. While the metric might seem impressive, it is not. You see the cannabis industry is flourishing owing to recent developments which is why Cronos’s actual revenue numbers do it no good compared to its biggest competitors – especially in the Canadian cannabis market.

Walton draws a comparison from Aphria’s revenue in the comparable period which was $160.5 million Canadian Dollars, up by 33% year over year. He believes that it is much easier for a company with relatively smaller sales to increase its top-line by those triple digital percentages.

Canopy Growth and Aphria are two companies that are currently fighting for the largest stake in the market as they enjoy leading positions in the Canadian cannabis market. Even though Cronos does manage to generate a bulk of its revenue from domestic operations – it still lags behind its competitors when it comes to revenue and market share.

Does Not Stand Tall Among Its Peers

Cronos planned on making the most from the U.S. markets, however, its revenue in the U.S. during the fourth quarter was a mere $3.5 million. The reason this did not impress investors was that most of the other big players in the U.S. market managed to rake in more. This left the company’s 30% year-over-year increase to be a bare minimum when you rake in potential prospects.

Come to think of it, the net loss of $61.1 million that the company faced during the quarter was a big drop from its net income of $89.8 million in the previous year.

Walton concludes that it would be easier to ignore the red ink on the bottom line if Cronos did not have such worthy competitors in the market. With their revenue and market share being considerably more favourable for investors, it does not allow Cronos to stand a chance against them. If only were its valuation more attractive than its peers, it would be able to draw out more investors.

So, even though Cronos seems to be turning things around for itself, it will still need time to gain credibility as a worthy cannabis stock. It needs to work more in strengthening its operations and providing more impressive financial results.

Disclaimer: Our content is intended to be used for informational purposes only.

It is very important to do your own research before making any investment based on your own personal circumstances.

You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.