Earlier this week, Cronos (NASDAQ:CRON) put out a press release confirming that tobacco company Altria Group (NYSE:MO) was considering an investment in the company, but that no decision was finalized. That changed this morning.
Altria announced a massive move into the tobacco space. It decided to make a C$2.4 billion ($1.8 billion) strategic investment into Cronos, confirming the earlier rumors. What is Altria getting in return for its billions? Post-deal, Altria will own 45% of Cronos. They are paying C$16.25 ($12.13) per share of CRON stock.
There are a few other perks for Altria as well. For one thing, they will get to nominate four directors to Cronos’ board of directors. Additionally, they get a warrant to purchase another 10% of Cronos at C$19.00 ($14.20), offering them nice optionality should CRON stock appreciate significantly in the future. It’s worth noting that the additional 10% option would make Altria the majority owner of Cronos.
This Is Great for Cronos
Earlier this week, our Vince Martin laid out the stakes for Cronos depending on what sort of deal they got from Altria. Martin warned that a small deal, say buying 10% of Cronos for a few hundred million dollars, simply wouldn’t be enough to please investors. Instead, Altria would need to go big, like Constellation (NYSE:STZ) did with Canopy Growth (NYSE:CGC).
Constellation’s purchase made it a strategic partner, not just a financial backer, and instantly made Canopy one of the most credible pot stocks out there. Well, good news for Cronos, they just got the exact same sort of endorsement. By taking a strategic stake, including significant representation on Cronos’ board of directors, it shows Altria is playing the long game here and will provide major support to Cronos going forward.
Short Sellers In Trouble
Trading will certainly be volatile in CRON stock over the next few days. Regardless, we can assume a few things going forward. For one thing, the stock should trade well north of $12 going forward. Altria’s $12.13 purchase price (in U.S. dollars) will likely serve as a hard floor for the stock in the coming weeks. If they feel it is worth that much, it’d be difficult for bears to argue that the stock should trade for less.
This is all bad news for those betting against CRON stock. As of the latest data report, short sellers had bet against more than 18% of the float, representing more than 28 million shares of CRON stock. We’ll likely see a great number of them covered in coming days, as the bear thesis is busted in the short term.
Additionally, it’s worth considering that bears were making massive bets against Cronos stock in the options market. To give just one example, there are 6,685 open put options at $10 for December expiry that were worth 90 cents Thursday. That’s more than half a million dollars in play. In theory, had CRON stock dropped to $7, these puts would have more than tripled in value. Now, however, they will expire as worthless.
Altria’s Move Invalidates the Bearish Thesis
Why do I say the short thesis is busted? Consider Citron Research’s salvo from a few months ago, for example. In it, Citron argued that Cronos stock was worth just C$3.50 for a few reasons.
For one, it wasn’t disclosing the size of its supply agreements, unlike rivals Canopy and Tilray (NASDAQ:TLRY). And its revenues were much smaller than Canopy, Tilray, Aurora (NYSE:ACB) and others. But the addition of Altria to the picture should pave the road for Cronos to get much larger distribution opportunities.
Citron also noted that Cronos’ actions didn’t always match up to their words. It specifically noted that the company made big claims about the developing the world’s most “innovative cannabinoid platform” while at the time spending just $1 million a year on R&D spending. However, with this huge infusion of funds and management expertise from Altria, Cronos can now invest more capably in research and product development if it wishes.
CRON Stock: Take Gains As It Soars
Now it’s not all good news. The long-term outlook for pot stocks is largely still negative. There are way too many companies chasing not enough demand. As with any gold rush, the majority of participants will end up as losers.
Former fund manager and longtime financial writer Doug Kass tweeted the following recently “‘Peak Pot’ (channel check!) Little customer activity in Los Angeles retail marijuana establishments. Black Friday brought on a 40% off sale.” It’s a good reminder that cannabis stocks will ultimately only succeed when real revenues get going. And many questions remain about the ultimate size of the legal marijuana market.
It’s unlikely that the market will support so many billion dollar and greater market cap companies in the near term.
At the moment, however, the bulls are clearly in control of CRON stock. The company’s strategic direction has been decisively validated with Altria’s investment. It’s worth remembering that when Constellation bought into Canopy this summer, Canopy stock traded higher eight days in a row. Constellation paid C$48 ($36) per share and CGC stock launched from $32 the day the deal was announced to $52 within a few weeks.
Short sellers are really trapped when these stocks ramp. CGC stock now, however, is back down to $32. CRON stock, similarly in a few months could fall back toward Altria’s $12 buy-in price, thus making it important to take profits as the stock ramps up now.
At the time of this writing, Ian Bezek owned CRON stock. He may sell some or all of this position within the next 72 hours. You can reach him on Twitter at @irbezek.