Two major news events that could fuel a stock market cycle
There were two major news events this week and each was enough to fuel an entire stock market cycle: one up and one down.
First, the negative report was the Seeking Alpha report by Hindenburg Research titled “Aphria – A Shell Game with a Cannabis Business on the Side” (read full report here) and a presentation by Gabriel Grego of Quintessential Capital Management (QCM) at a short seller’s conference on December 3, 2018. (see presentation here) Of course, even as the market was digesting this news, Cronos confirmed a rumour they were in discussions with Altria. In early trading after both of these specific news items were on the table, investors had a moment to respond.
The bears were prevailing in early trading on Thursday as Cronos was the only stock up among a representative sample of ten Canadian cannabis companies. At this time Aphria was down 20.7% and knowledgeable investors made Liberty Health Sciences the second worst performer down 15.3%.
On Friday, Cronos and Altria announced that an agreement had been reached. In brief, Altria Group the producer of Marlboro cigarettes plans to invest $2.4 billion in Canadian licensed producer Cronos Group which will give it up to a 55% stake. With cigarette smokers falling to an all-time record low among U.S. adults of 14% and Altria focussed on the American market, it is no secret big tobacco is looking at cannabis as a possible offset. Altria is also a major factor in the adult beverage market.
Initially, Altria will buy 146.2 million of newly issued Cronos shares at $16.25 per share for a 45% interest. The transaction also includes a four year warrant exercisable at CAN $19 per share that would increase Altria’s holding to 55%. Altria will also nominate four directors, including one independent, to the Cronos board. In a more than symbolic move, Alrtia also announced it will discontinue two of its e-cigarette brands based on “financial performance.”
The Cronos deal was a bit of a surprise as Altria management said they were not interested in cannabis until the U.S. federal law changed. Of course we know that Altria probably denied interest to throw competition off their trail. We see it all the time in the sports world when the coach of a struggling team receives the endorsement of the owner. That’s the kiss of death. In any case, the market response was positive.
The market response on Friday was very positive early in the day. The list shows that only Liberty Health that was hacked the day before was down. Afterward prices headed lower before a small rally at the close preserved a gain on the day. Aphria, however, would post a loss of 8.2% on the day while Liberty Health was down 6.4% on Friday.
Conclusion: last week the negative response to the reports on Aphria and Liberty Health outweighed the positive news from Cronos and Altria. In the week ahead, Aphria and Liberty have announced plans to respond to the Hindenburg allegations on a “line-by-line” basis. We will assess these responses carefully because this battle of the bulls and bears could have a major impact on the cannabis stocks in the months ahead. If the responses from Aphria and Liberty have any credibility, markets could move higher.