Marijuana stocks like Cronos Group (NASDAQ:CRON) stock have spent 2018 in the hype cycle. The hype cycle is a term common to technology investors. New technologies look exciting at first, but there is inevitably disappointment, followed by a long grind upward as the technology is adopted.
That’s been happening with marijuana. The stuff is easy to grow, it fetches a high price, so many investors considered it easy money a few months ago. Now, just as things settle down, Altria (NYSE:MO), formerly the U.S. unit of Philip Morris, is paying $1.8 billion to get 45% of Cronos, a medical marijuana company based in Canada.
The market has not reacted because the hype cycle has reached its destination. This is fine with Cronos stock, and Altria, because they’re not interested in the hype.
Getting Real About Pot
Altria dramatically overpaid for its CRON stock stake because the money is capital with which they hope to acquire a bigger share of the total industry. As the hype cycle calms down, expect Cronos to go on a buying spree.
Otherwise the deal makes no sense. CRON brought in barely $10 million in revenue during the first three quarters of 2018. Its balance sheet at the end of September showed it with barely $234 million in assets. Operating cash flow during the period was about a negative $33 million. Its market cap entering trade on Dec. 18 was $2 billion.
Altria’s $1.8 billion includes warrants that will give it control of the company for another $1.1 billion. That money, in turn, can be used to buy production facilities, market access and share as pot is transformed into a legal drug like tobacco, which is Altria’s niche.
The hype cycle was turned on by legalization of pot in Colorado and Washington. Those states haven’t burned down, and their citizens are not totally lost in a haze of mellow. In fact, pot prices are crashing, to as little as $100 per pound.
Regulators are struggling to come to grips with this, but it’s a problem Altria is familiar with from tobacco. By getting in now, when producers are disappointed, Altria figures to control supply, achieve regulatory capture and guarantee itself handsome profits as legalization spreads to New York and other states. It could be decriminalized completely by 2021.
Altria Needs Pot
Unlike Constellation Brands (NYSE:STZ), which put $4.4 billion into Canopy Growth (NYSE:CGC) this summer but would easily survive if Canopy failed because people will still drink, Altria needs pot to work.
Tobacco sales are going nowhere, nor will they. People just aren’t smoking cigarettes as they once did. Altria has become a tired stock, its gains trailing the Dow Jones Industrial Average over the last five years, the only compensation being an 80 cent per share dividend now yielding 3.2%.
Pot could make Altria great again. The company’s market cap of $98 billion dwarfs that of Constellation Brands, which is worth $33 billion, or any other player that exists or is rumored to be interested in the legal pot business. The U.S. market for legal pot is estimated to be growing at 25% per year.
The Bottom Line on Cronos Stock
In conventional terms, CRON stock is ridiculously overvalued. But it could transform Altria from a high-dividend stock into a growth stock.
If you want to speculate on pot, this is the way to play it. You’ll get a fat dividend to find out whether the pot craze turns into a growing, regulated business. If it does, you’ll be richly rewarded with a fat capital gain. If it doesn’t, you’ll still be richly rewarded with a steady stream of dividends.
The answer, for those interested in legal pot, seems obvious.
Buy Altria instead of CRON stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
