That's exactly what Constellation Brands (NYSE:STZ) has in mind. The S&P 500 member, known for its Corona beer and other alcohol brands, announced that it's investing $245 million (in Canadian dollars) to buy a 9.9% stake in Canopy Growth Corporation (NASDAQOTH:TWMJF). Canopy Growth is a leading medical marijuana provider in Canada.
There are several huge ramifications of this deal. Here are three of the most significant ways it affects Canopy Growth -- and could affect other marijuana stocks as well.
1. Endorsement of Canopy Growth as the best marijuana stock
This is a fairly big deal for Constellation Brands, considering the company is spending more to gain a minority stake of Canopy Growth than it spent on several recent full acquisitions of smaller breweries and wineries. However, this is a huge deal for Canopy Growth.
The investment by Constellation Brands is, in effect, an endorsement of Canopy Growth as the best marijuana stock on the market. Constellation had several alternatives in buying a stake in a marijuana grower. MedReleaf, for example, isn't too far behind Canopy Growth in terms of sales, but its stock is much less expensive.
Why did Constellation Brands chose Canopy Growth over all of the others? I think Constellation CEO Rob Sands gave a good reason in his remarks about the deal. Sands said, "Canopy Growth has a seasoned leadership team that understands the legal, regulatory and economic landscape for an emerging market that is predicted to become a significant consumer category in the future." In other words, Canopy Growth's management made the difference.
The selection of Canopy Growth by Constellation Brands will undoubtedly make the Canadian marijuana stock more attractive to individual investors looking to invest in the cannabis industry. Canopy Growth was already the biggest marijuana stock in terms of market cap. This deal appears to establish it clearly as the best marijuana stock on the market as well.
2. Major vote of confidence in the future of recreational marijuana
There's a larger impact of Constellation Brands' investment in Canopy Growth, though. Rob Sands said Constellation's "success is the result of our focus on identifying early stage consumer trends, and this is another step in that direction." Note the phrase "early stage consumer trends." Constellation Brands, a company on track to generate nearly $9 billion in revenue this year, thinks legalized recreational marijuana is on the way.
Sands was much more direct in an interview with The Wall Street Journal. He said, "We think that [legalization of recreational marijuana in the U.S. is] highly likely, given what's happened at the state level." Still, though, Constellation stated that it has no plans to sell any cannabis products in the U.S. or any other market unless or until it is legally permissible to do so at all government levels.
That should happen much more quickly in the Canadian market than in the U.S. market. Canadian prime minister Justin Trudeau is pressing ahead with plans to legalize recreational use of the drug in July 2018. Constellation Brands maintains operations in Canada, with one distillery located in the country. It could be that Canada becomes the first nation with access to cannabis-infused beer.
The fact that Constellation Brands is making a major vote of confidence in the future of recreational marijuana is good news for other marijuana stocks. Another Canadian medical marijuana grower, Aphria (NASDAQOTH:APHQF), has been the most aggressive at expanding into the U.S. If Rob Sands is right about U.S. legalization, Aphria could be a prime beneficiary.
3. Opens the door for other major company investments
Perhaps the the biggest impact of the Constellation-Canopy deal for marijuana stocks in general is that it could open the door for investments in marijuana stocks by other major companies. I have thought for quite a while that big tobacco companies could be eyeing the cannabis market. One of them could be especially paying attention to Constellation's latest move.
Altria (NYSE:MO) is one of the largest tobacco companies in the world but also owns a stake in Anheuser-Busch Inbev (NYSE:BUD), the largest beer maker in the world. If Constellation is planning to launch a cannabis-infused beer, Anheuser-Busch Inbev is probably thinking about it as well. And Altria could be also wondering if the time is right for expansion into what could become a significant consumer trend.
Which marijuana stocks would be most likely to attract the attention of large companies? I'd put all of the major Canadian marijuana growers on the list, including Aphria and MedReleaf.
Also, don't overlook the possibility of Constellation buying more of Canopy Growth. The current deal specifically grants "warrants which give Constellation Brands the option to purchase an additional ownership interest [of Canopy Growth] in the future."
Should you pour money into marijuana stocks, too?
It's not a good idea to be a "me-too" investor. Just because there's interest in a leading marijuana stock like Canopy Growth doesn't mean it's a good investment option for everyone.
Constellation Brands' optimism about national legalization of recreational marijuana in the U.S. might not pan out. Even if it proves to be correct, it could take many years. And the valuation of nearly every marijuana stock right now is nothing short of scary.
Still, the Constellation investment is certainly a validation of sorts for Canopy Growth. This deal just might be the tipping point for more deals, and even acquisitions of marijuana growers by larger companies.