Cronos (NASDAQ:CRON), the cannabis company best known for its multi-billion investment from Marlboro maker Altria (NYSE:MO) already is having a good year. Year-to-date, CRON stock is up more than 10%.
But Cronos is not alone. Pot stocks are bouncing back in 2020, with the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) up more than 10% already through the first two weeks of the year amid favorable fundamental developments (a handful of marijuana companies reported strong numbers in early 2020) and legal developments (among other things, Illinois just legalized recreational marijuana).
Here’s my two cents: early 2020 strength in CRON stock will extend into a year-long rally for the resurgent pot stock.
My rationale is simple. The whole cannabis sector will bounce back in 2020. As it does, Cronos will bounce back even more, because it represents one of the two highest quality investments in the space, and quality will become of increasing importance in this space as a clear divergence emerges between cannabis winners and cannabis losers.
Net net, Cronos looks good in 2020. I think shares will head materially higher. Here’s a deeper look at why.
The Pot Stock Rebound Is for Real
The big rebound in pot stocks is more than a head-fake or dead-cat bounce. It’s the real deal, and the start of something much bigger.
The legal cannabis market will inevitably be huge. Drug usage data among U.S. high school students shows a clear trend: young consumers are increasingly smoking weed, and today, they smoke weed almost as much as they drink alcohol.
The demand is there. The supply will get there, too, because consumer and government attitudes are rapidly shifting in favor of legalizing cannabis. Big demand plus big supply equals big market.
How big? Well, if you consider that the global alcoholic beverage market is in the $1 trillion-plus range and that cannabis consumption among certain demographics is nearly equal to that of alcohol consumption, it’s pretty easy to see the fully-legal global cannabis market measuring in the several hundred billion dollar range one day.
Outside of Canopy Growth (NYSE:CGC), all publicly traded cannabis companies feature sub-$3 billion market caps.
Clearly, these companies aren’t priced appropriately. They aren’t priced appropriately because investors got overly bearish in 2019 amid early challenges in Canada, the U.S. and elsewhere, and thought that these challenges would last forever.
They won’t. In 2020, they will fade. Demand trends will improve. Logistics will improve. Retail distribution will expand. Legislation will move forward. Everything will get better because everything is always better in Year 2 than in Year 1.
Pot stocks will bounce back. And they will hold onto these gains, because the cannabis market will only get bigger and better over the next few years as it marches towards its several hundred billion dollar potential.
Cronos Is a High-Quality Pick
In the cannabis space, Cronos stock is a high-quality pick, and that’s important because quality will be a key differentiation going forward.
There are a lot of cannabis companies out there. Not all of them will survive. When you look at the alcoholic beverage and tobacco industries, the two best comps for the cannabis industry, those markets are essentially oligopolies, dominated by only a handful of conglomerates.
The cannabis market will pan out no differently. It will go from hundreds of equally-sized players today, to a handful of super-sized players in a decade. This market consolidation means that while the cannabis market will grow by leaps and bounds over the next several years, this rising tide won’t lift all boats; high-quality boats will rise a bunch, and low-quality boats will fall by the wayside.
Cronos is unequivocally one of the high-quality boats in this space for one big reason: the multi-billion dollar investment Altria poured into the company.
That huge investment is a vote of confidence from a seasoned and smart management team over at Altria. It’s also enough money to shore up the balance sheet for the foreseeable future, absorb cash burn, and ease pressure on the company to cut corners to turn a profit.
Most importantly, it gives Cronos ample resources to invest in the cannabis space over the next several years. Only Canopy can rival Cronos in terms of this investment firepower.
Ultimately, then, CRON is one of the top two highest quality picks in the cannabis space. Thus, as pot stocks begin their multi-year rebound in 2020, Cronos will be at the epicenter of this rebound.
Bottom Line on CRON Stock
In a nutshell, what you have with Cronos is a sub-$3 billion company with a very reasonable opportunity to be one of the largest players in a potential several hundred billion global cannabis industry one day. That’s a compelling long-term value prop.
The market turned a blind eye towards this long-term value prop in 2019 amid near-term cannabis market challenges. In 2020, those challenges will fade from the scene. As they do, investors will increasingly adopt the long-term bull thesis as a consensus thesis. The more this happens, the more CRON stock will rebound.
As of this writing, Luke Lango was long CGC.