What happened
Canadian pot grower Cronos Group (NASDAQ: CRON) (TSX: CRON) saw its shares gain a jaw-dropping 70% last month, according to data from S&P Global Market Intelligence. The catalyst?
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The company’s shares took flight primarily due to the multibillion-dollar commercial opportunity presented by the Canadian adult-use recreational marijuana market that’s set to open up in October. Nearly every publicly traded Canadian pot producer experienced a sizable jump in its share price last month, after all.
However, Cronos’ stock got another boost last month from the reported interest by British alcoholic beverage maker Diageo (NYSE: DEO) in jumping into the legal Canadian pot market through either an equity stake or a joint venture. Cronos is the country’s seventh-largest pot company by production capacity, meaning that it might be an attractive partner for the likes of a Diageo or perhaps another interested party looking to get in on the so-called “green rush.”
So what
Unfortunately, Cronos’ winning streak came to an abrupt halt toward the end of the month, thanks to a report by Citron Research entitled Cronos: The Dark Side of the Cannabis Space. The report alleges, among other things, that Cronos Group’s management hasn’t been forthright with investors about the size of its supply agreements with Canadian provinces.
As a result, these supply agreements could turn out to be far smaller than some have been anticipating, dampening the possibility of a lucrative partnership with a major alcoholic beverage maker like Diageo.
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Now what
Putting Citron’s allegations aside for the moment, the more pressing matter is arguably that Cronos now sports the richest valuation among major Canadian pot growers. Put simply, Cronos’ sky-high valuation seems to be already baking in a large partnership. But the chances of a deal getting done in the next few weeks — or even months — might not be all that great.
The company, after all, is facing stiff competition from several other Canadian growers looking to curry the favor of alcoholic beverage makers. Investors, therefore, might want to stick to the safety of the sidelines with this red-hot pot stock for now.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool recommends Diageo and Diageo. The Motley Fool has a disclosure policy.
