Cronos Group (TSX:CRON) just received a huge vote of confidence from a major tobacco company and that has investors wondering if this pot stock is now a top pick in the marijuana sector. Let’s take a look at the current situation to see if Cronos deserves to be in your portfolio right now. Altria deal Cronos recently confirmed it was in talks with American tobacco giant Altria. Rumours of discussions between Canadian cannabis companies and beverage or cigarette firms have been common in recent months. In this case, a deal has emerged, and it…
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Let’s take a look at the current situation to see if Cronos deserves to be in your portfolio right now.
Cronos recently confirmed it was in talks with American tobacco giant Altria. Rumours of discussions between Canadian cannabis companies and beverage or cigarette firms have been common in recent months. In this case, a deal has emerged, and it is a big one that could jump-start a recovery in the marijuana sector.
Altria is taking a 45% stake in Cronos for $2.4 billion. That equates to $16.25 per share, which is a 16% premium to the closing price before the deal was announced. Under the agreement, Altria has the right to increase its stake to nearly 55% at a set price of $19 per share. Altria will get four board seats out of an expanded seven spots, effectively giving the tobacco giant control on the strategic direction Cronos will take going forward.
The news sparked an initial surge of 30% in Cronos shares to above $18, so the market likes the deal and Altria appears to have made a wise investment.
Time will tell if the enthusiasm has legs. Corona maker Constellation Brands invested an additional $5 billion in Canopy Growth in August at a price of $48.60 per share. The stock soared above $76 in the following weeks, but recently fell below $38.
Cronos is viewed as a leader in the research and development side of the industry, with specific interests in cannabinoid extraction and cultivation in lab environments. The company announced a key research agreement in September with Ginko Bioworks to produce cultured cannabinoids.
The tobacco industry is scrambling to adjust to changing trends in its industry, and Altria’s interest in Cronos could trigger a wave of similar moves by other players in the sector.
Should you buy Cronos?
Altria’s investment should boost investor confidence in Cronos and the $19 warrants could help support the stock. If you like the overall prospects of the industry, and are willing to ride out some additional volatility, Cronos deserves to be on your pot stock radar.
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Fool contributor Andrew Walker has no position in any stock mentioned.