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Why Cronos Group’s recent shakedown should be a warning to marijuana stock investors

Cronos Group (NASDAQ:CRON) (TSX:CRON) took a beating recently following what amounts to a sucker punch from well-known short-seller Citron Research. In a report ominously titled “Cronos: The Dark Side of The Cannabis Space,” Citron hit Cronos with a $3.50 target price, placing marijuana stock investors into a panic and sending the stock price down nearly 30 percent last Thursday. It was a significant reversal for the company, which saw share prices gain 70 percent in the previous month.

According to Citron, product recalls, non-competitive supply deals with Canadian provinces, and a lag in R&D spending are behind the valuation.

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Still, Cronos Group had an impressive Q2 report, which showed a 428 percent increase in year-over-year sales. The company announced additional grow capacity as well as new plans for expansion across the globe. They are also building a 286,000-square-foot indoor production facility.

“This year and subsequently, this quarter is about setting the stage and establishing Cronos Group’s strategy for future growth,” said Mike Gorenstein, CEO of Cronos Group in a statement. “Cronos Group delivered encouraging results across the Company in the second quarter with sales growing among all of our products and channels, impressive improvements in cultivation yields since the start of the year, and continued business development success in penetrating new markets and establishing new partnerships for expansion.”

Moreover, CEO Mike Gorenstein detailed the company’s provincial strategy on their latest investor call, insisting that Cronos was taking a measured approach to see how the market plays out long-term.

“I’m sure you have noticed that we have not rushed to announce our provincial listings,” said Gorenstein. “That was done purposefully and will be announced in due time in a cohesive and holistic manner once all provinces that we’re working with have finalized their distribution models and listings. In every province that we’ve pursued, we’ve received a listing or are in the final stages of securing a listing depending on what stage the province is in. We strategically did not pursue every province in this first go around, so that we could balance demand based on our committed supply and maintain a healthy relationship with those provinces for the next cycle.”

Cronos is still a buy, and at worst Citron’s given marijuana stock investors a decent price point at which to jump in “on the dip.”

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A couple of Twitter followers and a volatile market

But Citron’s report represents the downside of a volatile new market such as weed stocks. In fact, Citron’s “head of research” Andrew Left is a notorious short-seller in an age where, as Jesse Barron wrote in the New York Times Magazine, “[i]f you build enough of a reputation, all you need are some Twitter followers and a website.” He opens a short position (a bet that a company’s stock price will decline), publishes a report such as the recent one about Cronos, and then watches as investors panic and begin to sell. It’s all legal as long as the information he provides is not fraudulent, regardless of whether or not it’s in good faith.

“Left has emerged at the forefront of this new guard,” Barron continued.

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Last year Left supposedly uncovered some misdeeds at Ottawa-based e-commerce provider Shopify Inc. In what’s become typical for his over-the-top reports, Left wrote that Shopify had inflated its client base, claiming to have 500,000 business customers when in reality it had far less.

“We’re not saying Shopify’s technology doesn’t work,” wrote Citron in his report. “Out of the claimed 500,000 websites, Shopify has about 2,500 ‘Plus’ clients and maybe another 20,000 ‘Advanced.’ So where are the other 450,000 + websites????”

Citron’s takedown of the e-commerce giant saw stock prices fall 11.6 percent in one day of trading, equivalent to $1.5 billion of market value. Yet, for what it’s worth Tipranks.com lists Citron at a 52 percent success rate, ranking the “firm” 2,206 out of 6,637 bloggers on the site. Hardly an organization on which one should bet the farm.

In fact, it’s very rare for Left’s accusations to be proven true, which makes someone like him extremely dangerous to marijuana stock investors. After all, the market is already full of speculation. No one doubts that Cronos $1.75 billion market cap is extreme, but guys like Left hope that nervous investors are at a tipping point. His job is to push them over the edge.

What can marijuana stock investors do now?

Already there have been calls for a lawsuit, but it’s best for investors to stay away. Ambulance chasers usually follow-up these short-sell play with calls for class-action lawsuits, hoping to see what sticks to the wall. For most Cronos investors, it’s best to play the long game right now (which is what anyone in marijuana stocks should be doing anyway). Some may want to try a swing trade —selling now and buying back their shares when they fall even lower —but that's a risky game that has a high chance of backfiring.

In the meantime, marijuana stock investors should stay vigilant, as this won’t be the last time someone tries to play the market to their advantage.

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