A Wall Street analyst has crowned Canadian cannabis company Cronos Group a 'new king in the north' and upgraded its shares to 'buy'

• Stifel's W. Andrew Carter upgraded shares of Cronos Group to "buy" from "hold" and lowered his price target to $14.00 from $16.50.
• Shares gained as much as 2.83% in early trading Friday.
• Cronos is well-positioned to become the industry leader in cannabis because it has a lot of cash on hand to invest and can leverage its partnership with tobacco company Altria, according to Stifel.
• Watch Cronos trade live on Markets Insider.

Cronos Group is sitting at the top of the weed game, according to Stifel.

Stifel analyst Andrew Carter upgraded the company to "buy" from "hold" and lowered its price target to $14.00 from $16.50 in a note late Thursday. Shares gained as much as 2.83% on the news early Friday, extending gains from Thursday, when a series of purchases boosted shares overnight.

The upgrade comes amid what Carter described as a "sector meltdown" that began in July. Because of Cronos' underperformance during this time, when a slew of marijuana companies pared major losses, it's now trading at a discount versus its global competitors, Carter said.

"We believe renewed investor enthusiasm is inevitable as we consider the $200 billion global opportunity driven by regulatory and demographic tailwinds," Carter wrote.

Cronos is "unconstrained" in its ability to invest toward this as it has 2 billion Canadian dollars in cash on hand, which is 50% of its market capitalization, Carter said. It can also leverage the resources of tobacco giant Altria, which owns 45% of the cannabis company.

His price target of $14 assumes a seven times enterprise-value-to-sales multiple on Stifel's full-year 2021 sales estimate, with Cronos regaining a premium to its peers. Stifel estimates CA$450 million in sales in 2021, driven by Cronos taking a leading position in the vapor segment.

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While Carter wrote that he is anxious about the development of the Canadian cannabis market, which he called a "bureaucratic mess" that could keep the sector from growing, he acknowledged that there could be opportunities in sector fallout. In addition, Cronos' limited Canadian investment is now an advantage as opposed to a risk.

The company also offers "clear points of differentiation" from sector headwinds, Carter wrote, which suggests that its recent underperformance is a solid buying opportunity. Cronos has grown revenue, and Carter said it will likely use its partnership with Altria to build its US CBD business.

There is some risk to Stifel's outlook for Cronos in that the US vaping crisis has created uncertainty in Canada, Carter said. Delays in product shipments could hurt Cronos, but the issue is a "resolvable controversy" that could provide the company an opportunity to differentiate its growth profile, according to Carter.

Cronos is down nearly 20% year-to-date.