Forget Legalization: CBD Is Good Enough for CRON Stock

Cronos’ Lord Jones is the perfect brand for the American user

Like many other analysts, I believed that the full legalization of marijuana in the U.S. would represent a long-term catalyst for Canadian cannabis firms like Cronos Group (NASDAQ:CRON). Certainly, if the federal government de-scheduled marijuana, it would greatly help CRON stock and its ilk. However, the landmark Agriculture Improvement Act of 2018 is the only piece of legislation that savvy players may need.

As you know, the political environment since President Donald Trump took office has been nothing short of extremely contentious. Not a day has gone by without the Democrats and Republicans threatening and hurling insults at each other. That said, the two major parties found remarkable consensus in signing the Agriculture Improvement Act, otherwise known as the 2018 farm bill.

Under this federal law, industrial hemp and its derivatives like cannabidiol (CBD) would be legalized. The main caveat is that cannabis-based products cannot contain more than 0.3% tetrahydrocannabinol (THC) content. Of course, the beauty of CBD is that it offers the cannabis plant’s purported therapeutic benefits without getting you high. And here likes the opportunity for Cronos and by extension, CRON stock.

Last year, Cronos paid $300 million in a combination of cash and equity to acquire premium-label hemp brand Lord Jones. This deal is significant because the bought-out organization has tremendous credibility. According to CNBC, Lord Jones “was the first CBD brand to land a spot in beauty retailer Sephora.”

A key reason for CBD’s success in the U.S. market is that it doesn’t have the same stigma as marijuana. Coincidentally, marijuana sales in California have disappointed merchants and investors. Appreciation for CBD should continue, bolstering CRON stock.

CBD Is the Surprising Winner for CRON Stock

Prior to Canada’s legalization of recreational weed, many analysts were enthusiastic about its implications. In one move, their government would turn a black market into a viable, taxable one.

On the flip side, I’m sure more than a few folks regarded the U.S. farm bill more as a compromise than a victory. The idea was that people would much rather have the real thing than a dumbed-down version.

Admittedly, that was my initial gut reaction. But as I dove deeper into this topic, I quickly realized that the facts state otherwise. In the U.S. market, CBD, not marijuana is king. And that makes Cronos’ acquisition of Lord Jones a vital longer-term catalyst for CRON stock.

According to New Frontier Data, 26% of monthly CBD customers made purchases between $101 to $200. Further, 23% made monthly purchases between $51 to $100 and 16% made purchases between $201 to $300. Clearly, when CBD customers spend, they spend big!

However, I don’t find this statistic surprising based on what CBD is. Without the psychoactive compound of THC (or only a trace amount), CBD has a much broader audience. Particularly, CBD can penetrate markets that marijuana cannot (i.e., older, affluent, conservative white folks who have something to lose).

In contrast, the spending behavior of all cannabis consumers (which include marijuana) is stingier. For instance, those who are looking for cannabis (and not necessarily CBD) prefer to spend as little money as possible.

Thus, Cronos’ Lord Jones buyout is appropriate for two reasons: first, the American consumer loves their CBD. Second, the CBD buyer is not budget sensitive. In fact, the data suggests they prefer higher-end (and presumably classy) botanicals. That’s really a perfect environment for CRON stock once it works itself out of the market doldrums.

Risky but Worth It

As with cannabis-related investment, CRON stock is incredibly risky. Last year, Wall Street essentially called out the sector for betting on growth and not fiscal stability. Therefore, the cannabis market remains vulnerable to volatility.

At the same time, I think most of the bad news has been priced into shares. Moreover, those with viable CBD businesses, such as Cronos and Canopy Growth (NYSE:CGC) should see increased momentum in the U.S.

According to a Canaccord Genuity survey, experts predict CBD’s annual usage rate to hit 12% in the U.S. But by 2024, this metric could skyrocket to 35%. As investment analysts love to say, that’s a huge addressable market.

Along with the big individual spend among CBD users, the CBD demographic is reaching people that marijuana cannot reach. Ultimately, then, Cronos doesn’t need full legalization here. If these forecasts are correct, they can do just fine without it.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.