Creso Pharma Ltd (ASX: CPH) was the second most-traded share on the ASX last week by CommSec clients. Two weeks ago, the Creso Pharma share price was trading at around 3 cents, but has since shot up to 33 cents at the time of writing.
Creso Pharma develops and commercialises pharmaceutical-grade cannabis and hemp-based products for humans and animals.
What happened?
The recent surge in the Creso Pharma share price has been less about operational results within the company and more so regulatory changes in the US and Europe, which could potentially lead to some new growth opportunities for for the company.
Last month, the Court of Justice of the European Union (CJEU) ruled that cannabidiol (CBD) is no longer considered a narcotic and that member states must not prohibit the marketing of CBD products that are lawfully produced.
Creso has exposure in multiple European countries such as Switzerland, Portugal and Spain, so it’s likely this decision could prove to be beneficial.
Following this, the 53 member states of the Commission on Narcotic Drugs (CND), the United Nation’s central drug policy-making body, voted to reclassify cannabis as a less dangerous drug earlier this month.
Recent developments
Just a few days ago in the US, the House of Representatives passed a bill to decriminalise cannabis on a national level.
The house passed an act to remove cannabis as an illegal substance from the US Controlled Substances Act. Keep in mind that this bill still needs to be passed in the Senate, although it’s definitely a step in the right direction.
Creso has a 24,000 square foot cultivation facility that’s located in close proximity to the US border, so this should also put the company in a strong position moving forward.
Just today, Creso also announced that its subsidiary, Mernova, has secured new purchase orders and has expanded into Canada’s largest recreational market. The total value of the purchase orders received is $288,159.
Is the CPH share price a buy today?
I’ve learnt my lesson from buying stocks that have rocketed this quickly, so I probably wouldn’t be a buyer at the moment.
Momentum aside, it’s important to understand that it still might be quite some time before these regulatory changes actually translate into any sales and earnings growth.
Up until then, the market has collectively valued Creso Pharma shares at $227 million, putting them on a trailing price-to-sales (P/S) ratio of around 56x.
Creso recently bolstered its balance sheet through an $8 million capital raising. However, it appears to have cash burn of just under $2 million per quarter, based on its most recent 4C.
With around a year’s worth of cash in the bank, it’s really not a huge amount and given its history with capital raisings, I would be expecting more share dilution from this point.
At the end of FY16, Creso had around 31 million shares outstanding. This number has since increased to 688 million shares according to the company’s most recent ASX disclosure in October.
Summary
Personally, I wouldn’t be a buyer of Creso shares right now. I’d want to see some demonstrated track record of sales growth before investing.
Keep in mind there would many other similar companies all competing for market share, so Creso faces the same challenges that other companies would. In the meantime, consider asking yourself if you think it’s likely that these companies can maintain the current high valuation multiples while money still isn’t flowing in.
My guess (and that’s all it is) is that the Creso share price will reach a peak and then gradually retrace to lower levels as the cashflows stay more or less the same in the short-term. In addition, another capital raising would most likely put further pressure on the selling price as it further dilutes the existing shares on issue. Again, this is just a guess (predicting short-term share price movements is fraught with error).
In summary, this one’s a little bit too speculative for my liking. Things might turn out great for the company but without further research, I feel like it’s a bit of a punt as there’s obviously a fair bit of hype surrounding the stock at the moment.
For some other shares that I believe are less speculative, here are 3 ASX shares that I’m liking at the moment.
