Marijuana stocks have soared in 2019, and many mainstream investors are looking at taking their first steps into the cannabis investing arena. It’s not surprising, though, that many new investors in cannabis are reluctant to make big bets on the budding industry, especially given the volatile share price movements that its biggest stocks saw in 2018. Investing directly in companies that cultivate and grow marijuana takes a leap of faith for those unfamiliar with cannabis investing, but Canopy Growth (NYSE:CGC) has emerged as a first-mover in the field and is aiming at big expansions in its capacity. For more conservative investors, a company like Constellation Brands (NYSE:STZ) — which holds a huge stake in Canopy but also has a much broader consumer-products business focusing on beverages — seems like a safer play on marijuana.
It’s true that a well-diversified company like Constellation should see less of a decline if the cannabis industry can’t reach its current potential. Yet a direct investment in Canopy is more likely to produce big gains if things go well for marijuana’s future. Let’s look more closely at Canopy and Constellation with an eye toward deciding which stock looks like the better buy for investors of all kinds right now…
Valuation and stock performance
Canopy Growth and Constellation Brands have moved in opposite directions recently. Over the past year, Canopy’s stock price is up almost 115%, while Constellation is down 22% since this time in 2018. Even looking at 2019 year-to-date performance by itself, Canopy’s jumped 72% in just two months, while Constellation is up just 5% since the end of last year.
It’s almost meaningless to try to compare Canopy to Constellation on traditional valuation measures, because the two companies are at much different points in their respective histories. As a new upstart, Canopy isn’t close to being consistently profitable, and even its current sales don’t reflect the potential that investors see in the cannabis company’s future. By contrast, Constellation has run into some recent challenges, with its beer and spirits business experiencing pressures that have disappointed its shareholders. That’s pushed Constellation’s trailing earnings multiple down to 11, although when you take out some of the one-time factors that boosted the company’s bottom line in 2018, the stock’s forward multiple based on 2019 earnings projections climbs to about 18.
Comparing a young high-growth stock to a mature business typically just leads to debate. If you’re the sort of investor who can tolerate paying up for growth prospects, then Canopy could be worth the price you’ll pay right now. For those who tend to prefer value stocks, Constellation seems like the better fit despite the headwinds to its business.
The Canopy-Constellation partnership
Marijuana investors love it when cannabis stocks find major consumer products companies with which to collaborate. The idea behind such a partnership is that the young cannabis company can take advantage of the expertise in production, distribution, and marketing that the more mature consumer company has, along with its deep pockets and access to capital. Indeed, Canopy and Constellation were the first to explore such a collaboration to its full extent.
Constellation started out by dipping its toes in the cannabis space, spending $190 million to take an almost 10% stake in Canopy. Then last summer, the beer giant followed through by investing an additional $4 billion to take its overall percentage in the cannabis cultivator to around 38%.
The deals gave Constellation exposure to one of the strongest companies in the marijuana industry. Canopy was early in building up market share and getting the right to export dried cannabis to overseas markets. Brand awareness has been a priority for Canopy, which matches up with Constellation’s own desire to build up its key Corona and Modelo brands in beer. For Canopy, the capital has allowed it to consider major strategic moves that would have forced competitors to consider highly dilutive stock offerings.
Yet Canopy is still a small part of Constellation’s business. At current prices, Constellation’s stake in Canopy is worth about $6 billion, but the beer giant has a market cap closer to $30 billion. Marijuana will play a significant role in Constellation’s future, but it’s not so large that it dominates its existing alcohol businesses.
Growth prospects and risks
Because of the partnership, Canopy’s growth helps Constellation as well, but…
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