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Cronos-Altria Deal Boost Marijuana ETF: Will This Continue?

Zacks
Altria investment in Canadian cannabis producer Cronos sparked a rally in the broad cannabis sector and the its ETF. Will the trend continue?

The marijuana industry is super busy with deal activities. A number of alcoholic beverage companies are investing or partnering with cannabis producers in a move to benefit from Canada's move to legalize marijuana for recreational use. The latest catalyst is the marlboro cigarette maker Altria Group MO, which announced that it will invest $1.8 billion (C$2.4 billion) in Canadian cannabis producer Cronos Group CRON.

As part of the deal, Altria will buy 146.2 million Cronos shares at C$16.25 a piece, which marks a 16.2% premium to the Dec 6 close on the Toronto Stock Exchange and a 41.5% premium to the company's 10-day volume weighted average price ending Nov 30. The investment will represent a 45% equity stake in Cronos with a warrant to increase ownership to 55% over the next four years. The transaction is expected to finalize within the first half of 2019. Shares of CRON rallied 21.7% at the close on Dec 7 (read: Another Cannabis ETF on the Way).

The news sparked a rally in the broad cannabis sector and raised hopes of further investments. Corona beer maker Constellation Brands STZ in August announced a $4 billion investment in Canadian cannabis producer Canopy Growth CGC, marking the biggest investment in the industry.

In other news, Aurora Cannabis ACB jumped 10.8% after it announced its expansion into Mexico with the establishment of an exclusive supply deal with Farmacias Magistrales S.A. The company said Farmacias, a pharmaceutical manufacturer and distributor that reaches 80,000 retail points and 500 pharmacies and hospitals, recently received the first import license graded from the Mexico's Federal Commission for Protection Against Health Risks, which allows the company to import medical cannabis containing THC.

Leafbuyer Technologies LBUY recently partnered with recreational and medical cannabis dispensaries throughout several legal markets to bring consumers the best deals for the 2018 Green Friday Deals Event in late November.

As such, ETFMG Alternative Harvest ETF MJ — the first and only pure ETF targeting the cannabis/marijuana industry — surged nearly 5% on the news. The fund has been on a tough ride this quarter on a profit taking and weak earnings after an astounding surge in the third quarter. From a year-to-date basis, the ETF is down 10.8% (read: Top and Flop ETFs at Half-Way Q4).

MJ in Focus

The fund tracks the Prime Alternative Harvest Index designed to measure the performance of companies within the cannabis ecosystem, benefiting from global medicinal and recreational cannabis legalization initiatives. The fund holds 38 securities in its basket and Canadian firms make up for half of the portfolio, while American firms comprise 36%. The ETF has AUM of $622.5 million and trades in a good volume of around 710,000 shares. It charges 75 bps in annual fees.

What Lies Ahead?

The pot industry has been emerging and is poised for rapid growth given its widespread legality. Though cannabis remains illegal at the federal level in the United States, nine states and the District of Columbia have legalized recreational marijuana while 30 states have legalized medical weed. Canada is now the second country in the world to legalize the drug for both medical and recreational use, trailing Uruguay and the first country among the G-7 nations (read: Will Cannabis ETFs be on a High Again?).

According to the Arcview Market Research, the U.S. legal cannabis market is projected to reach $11 billion in consumer spending this year and more than $23 billion by 2022. Per an analyst at Cowen, the U.S. legal cannabis industry is expected to reach $75 billion in sales by 2030, surpassing the carbonated soft drink market in 2017.

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Constellation Brands Inc (STZ) : Free Stock Analysis Report
 
Altria Group, Inc. (MO) : Free Stock Analysis Report
 
Canopy Growth Corporation (CGC) : Free Stock Analysis Report
 
Cronos Group Inc. (CRON) : Free Stock Analysis Report
 
ETFMG-ALT HRVST (MJ): ETF Research Reports
 
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