Cronos-Altria Deal Announced

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Beyond the Bong
This is individual research and does not constitute investment advice.

Former first lady Eleanor Roosevelt once said, “Never be bored and you’ll never be boring.”

For cannabis investors, there is never a dull moment. And some may be wishing for a couple minutes of calm.

This week, cannabis was rocked by two major announcements…

Company Spotlight: Aphria Gets It in the Shorts

There was a waterfall drop last week from one of cannabis’s biggest producers. The entire sector felt it.

And I received more emails about this company than anything else this past week…

Canadian licensed producer Aphria (NYSE: APHA) had a terrible, horrible, no good, very bad day on December 3.

At the Kase Learning Shorting Conference, noted short seller Gabriel Grego of Quintessential Capital Management eviscerated the company with a monstrous 129-slide presentation titled “The Black Hole.”

He skewered Aphria as a “scheme to funnel money from retail investors into the pocket of shareholders…”

Now, besides the fact that that statement borders on nonsensical, it caused real damage.

As Grego’s report spread like wildfire, trading volume was seven times the average within the first hour of trading on Monday.

And shares of Aphria eventually lost as much as 52.5% on the fallout!

Grego claimed that Aphria’s Latin American assets were essentially worthless.

We’ve discussed here before that Latin America is the new frontier for cannabis companies. And they’re surging into the region to stake their positions.

He also accused Aphria insiders of individually benefiting from the deals and pointed to the company’s continuous negative cash flow.

Finally, Grego said Aphria’s product was low quality and infested with bugs and mold.

Aphria charged that Grego’s and Quintessential Capital Management’s claims were “manipulation” and “false.”

The company’s projected annual production for 2019 is 255,000 kilograms.

Though it did announce that it was creating a special committee to review one of its recent Latin America acquisitions, which was at the center of the short-seller’s report.

And a private equity investor affiliated with Aphria refuted Grego’s accusations.

Shares have clawed their way back from the new 52-week lows they set at $3.75 this week. But they exited the week in the red.

Short sellers have been targeting the cannabis sector in recent months. In the second quarter, short interest in the sector surged 44%, going after big names like Canopy Growth Corp. (NYSE: CGC) and Tilray (Nasdaq: TLRY).

I’ve always viewed Aphria as a wholesaler. It’s not a premium producer like Canopy. In the past, the analogy I’ve used is that Canopy is top-shelf alcohol, like Ketel One or Grey Goose. Aphria is rail booze, like Svedka.

With shares around $5, Aphria looks more and more like a bargain. Revenue is expected to jump more than 350% over the next two quarters – and more than 615% in 2019. I expect some volatility over the next several seasons as the tug of war plays out, though.

Top Cannabis Short Interest:

  • Tilray (Nasdaq: TLRY): 36.2%
  • Pyxus International (NYSE: PYX): 35.3%
  • Cronos Group (Nasdaq: CRON): 17.1%
  • Zynerba Pharmaceuticals (Nasdaq: ZYNE): 15.8%
  • Aurora Cannabis (NYSE: ACB): 9.4%
  • Canopy Growth Corp. (NYSE: CGC): 9.1%

Smoke ‘Em If You Got ‘Em!

For years we were told that Big Tobacco was going to swoop into the cannabis space and gobble up companies.

But the first major investments from outside companies were beverage makers…

Constellation Brands (NYSE: STZ) put $4 billion total into Canopy.

Molson Coors (NYSE: TAP) partnered with HEXO (OTC: HYYDF).

Diageo (NYSE: DEO) and others are sniffing around for partnerships.

The biggest winner for the past week was Cronos Group (Nasdaq: CRON)…

Shares skyrocketed more than 37%!

And it was all on Big Tobacco’s first major investment in the pot space.

Altria (NYSE: MO) announced it was taking a 45% stake in Cronos for $1.8 billion, with the goal to increase its ownership to 55%.

Now, Altria rakes in more than $19.5 billion per year. But revenue growth has stagnated. So plunking roughly $2 billion into cannabis isn’t going to break the bank.

Plus, Altria is moving away from e-vape products and Verve oral nicotine to focus on “reduced-risk” tobacco products.

This is another first for Cronos. The company was the first Canadian cannabis producer to be listed on a major U.S. exchange. And it’s the first to see a massive deal with a tobacco company.

This is big for both industries.

And now that Altria has made the first move, the question is: Who’s next?

Michigan Goes Live… But Nowhere to Buy

Recreational pot is now legal in Motor City.

Well, as long as you don’t smoke in public. And you’ll need to toke inside your home or some other private residence.

Of course, there’s a major fly in the ointment.

There’s no way to legally buy commercial cannabis in Michigan. The state still has to draft rules and regulations for the recreational market. Officials have until December 2019 to put those in place before the state can start accepting applications for licenses.

And then, the first recreational dispensaries wouldn’t go live until sometime in 2020.

In the meantime, residents can grow up to 12 plants in their homes for personal use. They can also give cannabis to friends and family – but they can’t sell it.

The legal cannabis market in Michigan is expected to be worth between $1.4 billion and $1.7 billion. That puts it up there with Colorado’s, Oregon’s and Washington’s cannabis markets in terms of size.

And it’s considered a major part of growth for U.S. sales forecasts…

Though, if residents can’t buy it and can grow it only for personal use, that might undercut revenue projections…

More Marijuana Firsts:

  • The first two adult-use dispensaries in Massachusetts recently opened. They’re also the first recreational dispensaries on the East Coast. They pulled in more than $400,000 in sales on their first day open.
  • Utah’s upcoming medical marijuana market won’t be as promising as voters wanted. A watered-down version of the voter-approved initiative was signed this week. Part of the compromise includes a potential state-owned central pharmacy.

The great thing about new markets and industries is there are enormous opportunities. The upside is almost infinite as the entire sector learns to stand on its own two feet.

Legal cannabis is in its infancy.

The recreational market in Canada is only weeks old. In the U.S., some states have had legal sales for years, but the industry is still fragmented at the federal level.

Because of all this, there’s going to be volatility going forward… both good and bad.

And the news of the past week showed the dichotomy at play.

Good investing,

Matthew