Despite some extreme volatility in recent trades, most people can’t get enough of marijuana stocks. But finally, some big name players have reaffirmed the general public’s bullishness. Case in point is Altria Group’s (NYSE:MO) $1.8 billion equity investment in Cronos Group (NASDAQ:CRON). The move features many positive implications, not the least of which is a massive boost for CRON stock.
When the deal made headlines, Cronos stock jumped nearly 22% against the prior day’s close. However, the following day’s price action was muted. But out of nowhere, shares slipped 7% midweek, reflecting the broader weaknesses seen throughout the legal-cannabis sector. Understandably, the sudden drop makes prospective buyers question whether they should engage now or sit on the sidelines.
Making matters worse, trading patterns in the options market imply significant nearer-term volatility. While predicting the directional trajectory is tough, market participants are clearly anticipating a big move. On paper, CRON stock doesn’t exactly have the best-performing financial metrics.
It’s always a good idea to respect market signals. Given that Cronos stock has lost a huge chunk following the Altria announcement, it’s wise to tread carefully. At the same time, I wouldn’t get paranoid about it. Thanks to the recent deal, Cronos can really open up its playbook.
Huge Cash Influx Boosts CRON Stock Over the Long Run
Prior to the groundbreaking partnership, CRON stock featured a relatively strong balance sheet compared to most cannabis firms. Notably, its debt levels have remained stable over the past few quarters while ramping up its available cash.
But with Altria’s pipeline of riches, the sky is the limit for Cronos stock. For one thing, the company’s primary goal is to establish an international presence. This ambition goes well beyond the North American sphere. CRON already has production and distribution platforms in Germany, Israel and Australia. As more countries go green, management has the resources to attack.
And believe me, those countries will open their doors. Just recently, South Korea became the first East Asian country to legalize medical marijuana. This follows Thailand’s similar announcement, taking the initiative among Southeast Asian countries. While we should interpret the news carefully, it’s nonetheless paradigm-altering. After all, virtually all Asian countries are socially conservative, especially about narcotics.
CRON Represents Superior Quality
Another factor that lifts CRON and the entire marijuana industry is that Altria validated the sector. Typically, marijuana firms must resort to alternative financing since traditional banking institutions fear the underlying commodity’s Schedule I classification. Altria reassured its fellow fat cats that cannabis is here to stay.
That said, analysts like The Motley Fool’s Sean Williams have questioned Altria paying a rich premium for CRON stock. Williams argues that Canopy Growth (NYSE:CGC) has more popular product brands. He also stated that OrganiGram (OTCMKTS:OGRMF) and CannTrust (OTCMKTS:CNTTF) have higher cannabis production capabilities, and at more efficient rates.
I don’t doubt that Altria looked at these and other options. After all, Altria makes the iconic Marlboro cigarette. They’re definitely in the driver’s seat. Moreover, they’re desperately seeking a catalyst for their overall business, which has suffered due to lower tobacco sales. Thus, Altria has every incentive to make the right decision.
But I believe the deciding factor came down to Cronos’ proven quality. This was the same reason why a few months ago, biotech startup Ginkgo Bioworks inked a deal with CRON.
Natural Synergies Benefit Cronos Stock
Botanical connoisseurs know that nothing ruins a high quite like cheap marijuana. According to a Brightfield Group consumer report, a significant number of weed consumers stated they would pay higher prices for superior quality.
Such sentiments obviously benefit Cronos stock due to the underlying firm’s superior products. This also confirms that Altria made the right choice in picking CRON as opposed to its rivals.
Most importantly, I don’t think this deal exclusively advances CRON stock at Altria’s expense. Cronos has a keen eye on developing premium cannabidiol (CBD); hence, its partnership with Ginkgo Bioworks. CBD represents a key ingredient among emerging marijuana sub-segments, such as CBD vaporizers and vape oils.
Altria already has substantial skin in this game through its heat-not-burn devices, which are similar to e-cigarettes. The big tobacco firm could easily focus more research-and-development dollars to weed-specific vaporizers. Such a move would expand the profile for both Altria and CRON stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
