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Pot Sector Regains Its Mojo After Altria's $1.8 Billion Deal

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Pot Sector Regains Its Mojo After Altria's $1.8 Billion Deal

  • Cronos surges as much as 38% on investment from tobacco giant
  • Gains offset weakness following Aphria short report this week
Cannabis in Canada

Here’s one way to get investors back into the battered marijuana sector -- throw $1.8 billion into it.

Cannabis stocks climbed Friday after Altria Group Inc., the maker of Marlboro cigarettes for the U.S. market, agreed to buy a minority stake in Cronos Group Inc., the fourth-largest Canadian cannabis producer by market valuation. The gains bring some relief to cannabis investors, who, as of Thursday’s close, had been poised for their worst weekly loss in six weeks after a short-seller report targeted Aphria Inc., raising questions about broader governance and financial disclosure in the adolescent industry.

Cronos surpassed Aphria’s market value for the first time this week and is now more than C$1 billion larger than its competitor.

Read More: Cracks Form in Cannabis Surge After Short Seller Targets Aphria

“An investment of this magnitude provides overall legitimacy to the industry as a whole and should represent a positive catalyst for the sector, with the news likely to drive valuations higher (particularly considering the sector’s recent pullback),” Canaccord Genuity analyst Matt Bottomley wrote in a note.

The stocks have been trending downwards over the past two months as the initial exuberance that propelled valuations to record levels ahead of Canada’s move to legalize recreational adult use cooled abruptly as the reality of supply constraints and high prices set in. A pair of exchange-traded funds tracking the marijuana sector in the U.S. and Canada have lost at least 30 percent since Oct. 15, two days before the regulation change.

Cronos was up 22 percent to C$17.08 at 12:10 p.m. in Toronto after earlier gaining as much as 38 percent, its biggest intraday gain since July 2016. Aurora Cannabis Inc. rose as much as 11 percent, Canopy Growth Corp. climbed 7.3 percent and Tilray Inc. gained 5.5 percent. Aphria gained as much as 17 percent, retracing some of its losses this week, although the stock is still poised to end the week at its lowest price since November 2017.

Cronos CEO Mike Gorenstein said the investment “puts us in an amazing position to succeed in a number of areas.”

“We think that we picked the strongest possible partner, we’re very excited they picked us, and this pushes us to exactly where we wanted to be,” Gorenstein said in a phone interview.

(Adds chart, updates stock prices, adds CEO comment in final two paragraphs.)