While cannabis may conjure up feelings of mellowness, investing in pot stocks is more of a roller coaster ride. And it’s not always fun.
Take your pick. Cronos Group, Canopy Growth, Aurora Cannabis, Curaleaf, The Green Organic Dutchman, MedMen, Tilray and others have been extremely volatile this year.
Earlier this week, Cronos (NASDAQ: CRON) shares vaulted more than 30% in just a couple of days after it confirmed the existence of talks with tobacco giant Altria Group about a possible alliance. Altria, the world’s largest tobacco company and owner of the Marlboro brand, has been hunting for a deal for a while. This development sparked excitement because it marks the most concrete evidence yet that Altria plans to bring its considerable cash, distribution and agricultural resources into the cannabis sector.
For all the fuss around Cronos, it posted well under $5 million in revenue in the latest quarter. While it’s building facilities to meet Canada’s booming demand for cannabis, Cronos remains a micro-cap, a purely speculative play.
Quintessential Capital Challenges Aphria
Meanwhile, Aphria (NYSE: APHQF), another closely-watched Canadian cannabis company, has been beaten up on after a short seller—a hedge fund that bets on stocks to go down—made negative comments about the company on Bloomberg TV, which led to a 50% stock dive in three days. It was Quintessential Capital, focused on Aphria’s new alliance in Latin America, who raised questions on whether the company could continue to raise cash. It certainly comes as no surprise that a firm positioned to benefit if a stock loses value would make disparaging remarks about it. But it was more than enough to have investors rushing to the exits in recent days.
Big Liquor has already made a move into cannabis. This past summer, Constellation Brands invested $4 billion in Canopy Growth (NYSE: CGC) in the largest cash infusion yet in the budding marijuana sector. Other alcohol giants like Molson Coors have also waded in a joint venture with Canada’s Hydropothecary. It’s been expected for some time that other consumer product giants from other business lines would wade into the space.
In a contest between the Cronos Group and Aphria developments, Cronos wins out. It’s a larger story, overall.
With Altria talking to Cronos, it could result in a big boost to the latter company’s fortunes. Faced with fewer smokers, competition from Juul and other e-cigarette makers and rising resistance from some stock market investors, linking with Cronos could be a good bet for Altria to gain expertise in the sector.
On the other hand, Cronos may not want to team up with a tobacco company for other reasons. Nowadays, more investors are steering away from so-called “sin stocks,” such as tobacco and coal companies, due to their negative social impacts (cancer and global warming).
“On the one hand, their tobacco products make people sick and then now they want to get into the business of helping people feel better through cannabis before they die,” Matt Karnes of GreenWave Advisors, a cannabis research firm, tells Freedom Leaf. “Why don’t they just buy a chemotherapy company?”
The Rise in ESG Investing
Environmental and social governance investing, also called ESG investors, will likely see medical pot as a positive place to put their money, but recreational use may fall into the sin stock bucket. Cronos, which is mostly a medical producer at the moment, may want to avoid being in the same investing category as cigarettes, smoggy fuel for power plants and makers of automatic weapons. Still, many investors won’t care, as long as they see a big return ahead.
The big share price moves by Aphria and Cronos remain victims of speculative investors reacting to the “story” around the company rather than any fundamentals of their underlying business. If the stories change around Cronos, Aphria or any other pot stock, get ready for a huge swing in stock prices and hold on for the ride.
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