If you think the broad-based S&P 500 is having itself an incredible year, then you probably haven't been paying close enough attention to the marijuana industry. The very first cannabis exchange-traded fund, the Horizons Marijuana Life Sciences ETF, has practically tripled the return of the S&P 500 since the year began.

Among the outperformers this year is beloved marijuana stock Cronos Group (CRON -4.46%). At one point in 2019, Cronos had rallied nearly 125% following the December announcement that tobacco company Altria (MO -2.77%) would take a $1.8 billion stake in the company. This equity stake, which gives Altria a 45% voting share in Cronos, closed in March, and it opens plenty of pathways for Cronos now that it's loaded with cash.

A tipped over jar filled with cannabis buds, lying atop a small pile of cash.

Image source: Getty Images.

Sorry, folks, but this wasn't a quarter to cheer about

But for as much buzz as there is surrounding marijuana stocks, what really matters is whether they can deliver the green come earnings time. On Thursday, May 9, Cronos Group delivered its first-quarter operating results, and while the bottom-line number was, in fact, a profit, the company's results stripped of one-time benefits and gains were laughably bad.

For the quarter, Cronos Group generated $6.47 million Canadian in net sales ($4.81 million), a 120% year-over-year increase from the first quarter of 2018, with CA$6.99 million in gross sales. The difference between gross and net sales being the excise taxes that growers pay on dried cannabis sales.

Taking into account the company's cost of goods sold, Cronos produced a reasonable gross margin of 54%, up from 47% in Q1 2018. The improvement was primarily attributed to extract sales (i.e., oils) representing 23% of total revenue in Q1 2019, up from just 9% in the year-ago quarter. Cannabis derivatives are a much higher margin product than dried cannabis flower, and are expected to be a primary focus for Cronos Group in the future. Remember, this is a company that could wind up spending as much as $100 million to gain access to Ginkgo Bioworks' microorganism platform. This platform is expected to produce yeast strains that can yield desired cannabinoids at commercial scale, and for a low cost, relative to traditional extraction techniques.

The end result of Cronos Group's first quarter was a CA$427.8 million profit (no, not a typo), which worked out to a CA$0.48-per-share profit, on a diluted basis.

Everything looks great, right? Well, not so fast.

An investor holding a magnifying glass over a company's balance sheet.

Image source: Getty Images.

Three one-time benefits mask another abysmal performance

Behind this monstrous gain were three one-time benefits or adjustments. Remove these benefits, and Cronos Group's quarter wasn't nearly rosy.

Beginning above the line, Cronos Group was the beneficiary of a positive fair-value adjustment on its biological assets -- an International Financial Reporting Standards (IFRS) requirement for agricultural companies in Canada. Under IFRS accounting, cannabis growers are required to constantly revalue their crops, based on their estimated value during the grow cycle, as well as project what it'll cost to sell their weed, often well before they actually do sell the product. This regular revaluation can lead to some wild quarterly swings. In the first quarter, Cronos Group netted a total positive fair value adjustment of CA$9.83 million. Without this adjustment, its gross profit would have been just CA$3.49 million.

Secondly, Cronos Group recorded a gain of CA$20.6 million on the sale of its stake in Whistler Medical Marijuana to Aurora Cannabis (ACB -4.42%). Aurora wound up acquiring Whistler Medical Marijuana during the first quarter for about $130 million in order to bolster its presence in British Columbia, as well as gain access to Whistler's well-known cannabis brands on Canada's west coast. But Cronos owned a nearly 20% stake in Whistler, which meant Aurora had to issue its stock to Cronos to cover the cost of its 20% share. Cronos eventually sold this allotment of Aurora Cannabis stock, pocketing the aforementioned gain, and generating an 8.7-time return on its initial investment in Whistler.

Thirdly, Cronos Group recorded a massive CA$436.4 million non-cash unrealized gain on the revaluation of derivative liabilities. Without getting too complex, these derivative liabilities primarily pertain to Altria's anti-dilution rights as a 45% equity stakeholder. Between the warrants Altria received following its equity stake, and its anti-dilution rights, Cronos Group will henceforth be recording the fair value of these derivatives at the end of each quarter. Since this is the first quarter these derivatives are being recognized, it resulted in a huge gain and the company's big diluted profit.

However, remove these one-time gains and focus solely on gross profit (sans adjustments) and operating expenses, and the company lost CA$10.4 million on an operating basis. 

An up-close view of a flowering cannabis plant growing indoors.

Image source: Getty Images.

This is simply not a top marijuana stock

Even though Cronos Group is now flush with cash, the buoyancy that a large cash balance provides is certainly not enough to maintain its lofty $4.7 billion market cap (following its earnings-day dive). Following five and a half quarters of a legalized recreational sales in Canada, Cronos Group has produced just $10 million (U.S.) in sales, and it's shown little improvement on an operating basis, with the exception of its gross margin.

What's more, this is a company with peak annual output of maybe up to 120,000 kilos, if everything went its way. That's behind at least nine other growers, following Tilray's production expansion announcement this past week. And if we're talking about sheer volume of cannabis sales, the Pure Sunfarms joint venture between Emerald Health Therapeutics and Village Farms International, and Auxly Cannabis Group's licensed production plus wholly owned grow farms, can both top Cronos Group. It's honestly not even a top-10 marijuana company by what it can bring to market, yet it's being valued as if it were a top-three company.

Making matters worse, Cronos hasn't done a particularly good job of expanding into overseas markets, with modest-sized grow farms in Israel and Australia, and distribution in place in Germany and Poland. This handful of overseas markets significantly trails its similarly sized peers. Not to mention that having only five provincial supply deals in place makes it appear that Cronos is lagging domestically, too.

As I've opined before, Cronos has proved time and again that it is, hands-down, the most overvalued pot stock.