Pot stock mania is heating back up again. Specifically, Reuters reported on Monday that the company behind Marlboro cigarettes, Altria (NYSE:MO), is in early talks to acquire Canadian cannabis company Cronos (NASDAQ:CRON).
The Financial Times ran an article detailing that buyout interest in the cannabis sector is heating up, and that big name tobacco and beverage companies like Altria and Coca-Cola (NYSE:KO) have held multiple early-stage investment talks with cannabis players such as Cronos, Tilray (NASDAQ:TLRY), and Aurora (NYSE:ACB).
The broad implication here is that big-time tobacco and beverage companies see the long-term potential of cannabis companies, and want to get in early, even if it means paying a premium. The investment implication? CRON stock could surge over the next few days. But, it could also drop a whole bunch.
This isn’t the last chapter in the cannabis craze.
In fact, it is almost assuredly one of the first few chapters in a book with lots of twists and turns. Some that will send pot stocks surging, and others that will send them plummeting.
In this most recent chapter defined by M&A chatter, CRON stock is the clear winner. Both Reuters and the Financial Times, two very well respected sources, reported that Altria is interested in investing in Cronos, and Cronos itself confirmed such talks. While this deal isn’t a sure thing, it does look increasingly likely that it will happen, and if it does, CRON stock will jump higher. If it doesn’t, though, CRON stock could drop a whole bunch.
As such, buying CRON stock here looks like a high-risk, high-reward play.
Why Altria Should Invest In Cronos
The writing is on the wall for tobacco giant Altria. The era of smoking tobacco is over, and the era of smoking cannabis is upon us. From 1991 to 2017, the percentage of U.S. high school seniors who smoked cigarettes dropped from nearly 30% to below 10%. Meanwhile, during that same stretch, the percentage of seniors who smoked cannabis rose from 13% to 23%.
Clearly, weed is already the new tobacco, and this is before nationwide legalization in the United States. Imagine what will happen when pot becomes legal across the U.S. Traditional tobacco cigarettes will become a thing of the past, replaced entirely by cannabis.
From this perspective, tobacco giant Altria desperately needs to diversify their business. They are already doing this, with e-cigarette investments. But the company has yet to expand into the cannabis sector. Considering underlying trends related to cannabis usage, diversification into this sector is necessary.
When it comes to this sector, Cronos is as good a buy as any. There are really four big players here: Cronos, Tilray, Aurora, and Canopy Growth (NYSE:CGC). Canopy already has a big investment from Constellation Brands (NYSE:STZ), so they are off the table. Aurora and Tilray are both pretty expensive, with market caps over $5 billion.
Meanwhile, Cronos carries just a $2 billion market cap. But, the company still has 1.2 million square feet in planned production capacity. Thus, on a per square foot basis, CRON is the most attractively valued pot stock in the group.
From this perspective, Altira making a big investment into CRON stock makes sense. This is the cheapest and arguably best way for the tobacco giant to gain necessary exposure to the cannabis market.
Cronos Stock Has High-Risk, High-Reward Potential
At the current moment, CRON stock is a high-risk, high-reward play that isn’t for the faint of heart.
CRON stock has rallied more than 30% over the past five days due to news of a potential deal alone. Meanwhile, other pot stocks are down during that stretch. As such, it is clear that the market is pricing in a high likelihood that a deal goes through.
I think the market is reasonable to expect that. Considering Altria’s need for cannabis exposure and CRON stock’s relatively attractive price, a deal will likely go through, and Cronos stock will likely continue to head higher from here. Just look at what happened to CGC stock following the Constellation Brands investment. That stock rallied 90% in a month.
On the flip side, if a deal doesn’t go through, there is enormous downside risk here. CRON stock could easily give up in its entire 30% gain, and then some, because the market is already bullish about the prospects of deal.
From this perspective, recent M&A chatter makes Cronos a high-risk, high-reward play.
Bottom Line on CRON Stock
If Cronos gets the Altria investment, this company will enter Canopy Growth territory as one of the only pot stocks with a multi-billion dollar backing, and CRON stock will pop higher. If they don’t get the deal, CRON stock could tumble by a whole bunch. As such, this is a high-risk, high-reward play that should be reserved for risk-seeking investors.
As of this writing, Luke Lango was long CGC stock.