The bumpy ride for Cronos (NASDAQ: CRON ) stock investors continued this week when the cannabis stock got some more love from Wall Street. On Monday, Piper Jaffray analyst Micael Lavery initiated coverage of Cronos Group stock with an “outperform” rating and $18 price target.
Lavery’s initiation note was 29 pages long. However, the bull case for Cronos boils down to three main points.
CRON Stock Has a Big Brother
While other cannabis producers are out there trying to grow their business organically, Cronos has a perfect benefactor. In December 2018, tobacco giant Altria (NYSE: MO ) invested $1.8 billion for a 45% stake in Cronos. In my opinion, the Altria partnership is the single biggest reason to consider CRON stock.
“We believe its partnership with Altria provides important capital ($1.8 billion cash) and access into 230,000 U.S. retail outlets, as well as regulatory and vapor product expertise,” Lavery wrote.
I would add two points to Lavery’s case. U.S. (and potentially global) cigarette volumes are seemingly in secular decline. In other words, Altria needs Cronos as much as Cronos needs Altria. Tobacco companies are starving for growth. Cannabis could be a long-term lifeline.
Second, Cronos Group stock investors hoping for U.S. cannabis legalization should realize one thing about their investment. They are investing in a tobacco company. As part of the terms of its 45% investment deal, Altria has the rights to take a full ownership stake at some point down the line.
In my opinion, whether or not Altria exercises that option hinges on U.S. cannabis legalization. Without access to the U.S. market, Altria may not want to fully acquire Cronos. But if the U.S. ultimately legalizes weed on a federal level, I bet Altria’s first move is a Cronos takeover.
Progressive CRON stock investors may not like the idea of a tobacco takeover. But if the future of Altria is cannabis, at some point Altria is no longer a tobacco company at all.
CBD Provides CRON Access to U.S. Market
All cannabis stock investors know that U.S. federal marijuana legalization is the golden ticket. In the meantime, cannabidiol (CBD) may be the best way for Canadian producers like Cronos to get their foot in the U.S. door.
CBD is a non-psychoactive, cannabis-derived chemical compound that was legalized in the U.S. in December 2018. The caveat is that only CBD produced from hemp, not marijuana, is legal. Lavery is expecting Cronos to use its $1.8 billion in Altria capital to launch a U.S. CBD strategy within the next year. In fact, he is projecting 60% of Cronos’ 2020 revenue will come from CBD.
Cronos Group’s Brand Awareness
The third big feather in Cronos Group’s cap is its recent $300 million buyout of Redwood Holdings, parent company of early CBD brand leader Lord Jones.
For millennial investors who are a fan of alternative data, Lavery included a cool statistic on Lord Jones in his note. Lord Jones alone has nearly 80,000 Instagram followers. That’s more followers than the leading brands of popular cannabis stocks Tilray (NASDAQ: TLRY ), Charlotte’s Web Holdings (OTC: CWBHF ) and Curaleaf Holdings (OTC: CURLF ).
It may seem like a trivial statistic, but social media popularity is an important measure of brand popularity. Marketing experts know brands are the key to success in untapped markets like the U.S. If Lord Jones becomes one of the gold standards in U.S. CBD, don’t be surprised if Cronos/Altria markets its marijuana under the Lord Jones brand in the event of U.S. legalization.
Understanding the Risks of CRON Stock
The one thing I always try to include in my stories about cannabis stocks is a note about the risks involved in investing. There are so many uncertainties in the cannabis space right now. As if that weren’t enough of a risk, cannabis stock valuations are sky-high, likely including at least some expected value from the U.S. marijuana market.
Instead of rehashing points I’ve repeatedly made, here’s Lavery’s take:
“We see a long runway of growth in the cannabis space, but valuation still has many speculative elements and can be very imprecise, given the early stages of the category and the myriad ways it could evolve,” he wrote.
Lavery makes some good points about buying CRON stock. However, any cannabis stock is a pure speculation at this time and these valuations. Don’t invest any cash you wouldn’t be comfortable losing in a worst-case scenario.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
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