What happened
Shares of Cronos Group Inc. (CRON 2.85%) were up 12.5% as of 12:20 p.m. EDT on Wednesday. The Canadian marijuana grower announced earlier in the day that it was establishing a joint venture to enter the Latin American medical cannabis market.
Cronos stated in a press release that it had entered into an agreement with an affiliate of Agroidea SAS to form NatuEra, a 50/50 joint venture that will cultivate cannabis in Colombia. Agroidea is one of the top agricultural-services providers in Colombia. NatuEra will target the expanding medical cannabis markets in Latin America and potentially export to other global cannabis markets in the future.
Image source: Getty Images.
So what
I suspect that the optics of Cronos Group's joint venture are more important than the deal itself. Cronos Group is one of only three Canadian marijuana growers to trade on U.S. stock exchanges. Its stock has soared over the last couple of weeks following Constellation Brands' $4 billion investment in Canopy Growth.
Diageo plc (DEO 0.98%) now is reportedly seeking its own cannabis partner. Cronos Group could very well be on the British alcoholic-beverage-maker's short list. A highly visible move into the Latin American market only helps reinforce the image that Cronos wants to project itself as a global cannabis leader.
No South American country ranks in the top five international cannabis markets outside of the U.S. and Canada, according to an analysis conducted by Arcview Market Research and BDS Analytics. The two research firms project that Colombia's medical cannabis sales will only be $8 million by 2022. Argentina and Brazil are expected to be bigger, though, with projected medical cannabis sales of $48 million and $62 million, respectively, by 2022.
However, Cronos Group's Latin American joint venture shows that the company is targeting cannabis markets across the world. The company already has a supply agreement with a large German pharmaceutical supplier. Cronos also has formed joint ventures in Australia and Israel.
Investors are jumping into marijuana stocks in a major way after the huge Constellation-Canopy deal. Any good news, especially for a stock trading on a U.S. exchange, is likely to provide a nice boost to a company's share price -- as it did for Cronos today.
Now what
What happens next for Cronos Group's share price depends on several variables. A biggie is Diageo's decision. I think Cronos Group is a contender, but I also suspect that there could be more attractive partnership prospects for the beverage company.
Another key factor is how well the opening of the Canadian recreational marijuana market goes. This market is scheduled to open for business in October. Cronos should be one of the top winners, but the stock could be in trouble if demand isn't as great as expected.
Thanks to its big run-up in recent weeks, Cronos Group now has a market cap of $2.2 billion. There's a lot of growth baked into the share price. If Cronos can deliver on growth expectations, we could see more days like today. If not, though, Cronos Group stock could be a bubble waiting to be burst.
