Beer, Pot, and More Beer (and Earnings)

In this very special episode of MarketFoolery, host Chris Hill and analyst Matt Argersinger talk about a few of the stock market's biggest and most mind-altering stories. Constellation Brands (STZ 0.53%), the alcoholic beverage giant behind Corona and Svedka, just bet $4 billion on Canadian cannabis producer Canopy Growth (CGC 20.65%). Constellation shares plummeted 9% on the news. What gives? With recreational marijuana laws finalizing in October, Canopy can only go up from here, right? Well, not quite.

Matt explains the risks of investing in marijuana companies, and why investors hated Constellation's move so much. Also, Macy's (M 0.16%) put in a pretty good quarter, but its stock still fell a whopping 13% on the report. The guys discuss how the U.S. markets are soaring while international ones have struggled year to date, as well as reports that behind the scenes, the private markets are getting frothy. They end the show with a story about Bud Light dropping fridges of free beer all over Cleveland...with a catch. Click play and find out more.

A full transcript follows the video.

This video was recorded on Aug. 15, 2018.

Chris Hill: It's Wednesday, August 15th. Welcome to Market Foolery! I'm Chris Hill. Matt Argersinger is in the house, producer Dan Boyd is back behind the glass. We're ready to go. We have a bunch of things to get to. We have very interesting news from the beverage industry, we're going to talk international, we're going to talk a little bit of private markets, and maybe my favorite story heading into the NFL season. 

We have to start with Macy's, though. Help me understand this, Matty. A good second quarter report. Profits and revenue, higher than expected. They raised guidance for the full fiscal year. Why is this stock getting punished today? It's down 13%.

Matt Argersinger: I think it's one of those situations where the stock has rebounded so much this year -- I forget what it's up by, I didn't look it up.

Hill: It's up about 80% -- even with the drop today -- in the past 12 months.

Argersinger: There you go. The stock has had such a nice run. It's been incredible. It's one of those situations where the stock got way ahead of the fundamentals. The report was good. You mentioned, they beat expectations on revenue and earnings, raised full-year guidance, that's great. Their comparable store sales, which is the key retail metric we like to focus on, growth there was expected to be between 2-2.5% this year. OK. 

But you have to remember, here -- comps have been down three consecutive years for Macy's. In fact, cumulatively, they're down about 8%. Macy's is getting a fraction of those sales back. Meanwhile, they're still closing stores, mall traffic is still trending lower in most places. Even in their best locations, the unit economics just aren't that great for department stores right now. There's all that, too.

Hill: Two things on that. One, in terms of the same-store sales, I suppose we should all keep in mind -- and that's what we're seeing a little bit with the sell-off today -- when they're talking about their same-store sales growth being in the neighborhood of 2-3%, that also includes the holiday quarter. If you're baking in your holiday quarter and you're still only expecting 2-3%, that's not great. 

The other thing is, on yesterday's show, Seth and I were talking about Home Depot and the quarter they just put up. We didn't hit this point specifically, but one of the metrics they broke out was their sales per square foot. Like pretty much everything else in Home Depot's quarter, it was up. That's the thing about Macy's that they've gotten away from. One of the areas that Macy's used to excel at was, they kept their overall store count relatively low compared to the profile of the brand. And, they did a better-than-average job on sales per square foot. They've really gotten away from that.

Argersinger: It doesn't feel like that premier anchor store that they used to be. They opened too many stores. We have too many malls in this country anyway, we know that. If you've held on to Macy's shares in the last few years, wow. Bless you, because you've been through some rough times and you've come all the way back from the brink. But I'd say, this year has been a bit of a gift, you might want to cash it in.

Hill: Constellation Brands is in the business of alcohol. Constellation has a bunch of brands under their umbrella. They have beer, probably best-known for Corona and Ballast Point. They have wine, Robert Mondavi and Woodbridge are probably the better-known brands there. For liquor, Svedka vodka is probably their biggest brand. They have High West Whiskey, although that's more of a niche in the whiskey world. 

They didn't report earnings, but they did just make a $4 billion investment in Canopy Growth, which is the publicly traded marijuana company. Trades on the Toronto Exchange under the fabulous ticker symbol WEED.

Argersinger: Love it.

Hill: This takes Constellation Brands' stake in Canopy Growth from just under 10% to 38%. The stock is down about 9% on this news, and you're not surprised.

Argersinger: Not at all. [laughs] I mean, I get the idea. You want to take the edge off, you have your glass of Mondavi wine or your Corona beer, and maybe you're throwing a blunt or two. There's definitely some, I hate to use the word, synergy between cannabis and alcohol. People who love one probably love the other. But this deal doesn't make sense to me. 

You have this Canopy Growth business -- which, by the way, trades for about 100X revenue right now, roughly. They're taking a $4 billion stake in it. This is all because -- this is a Canadian company. Canada is going to be fully legalizing marijuana use beginning in October. There's anticipation that sales for this company are going to surge. We're going from just this medical marijuana industry to full-fledged marijuana for everyone, so the sales are going to surge. I think that's a terrible way to look at it. 

Canopy Growth is one of dozens of companies, if not hundreds of companies, that are going to be flooding into this market. The supply that's out there is going to shoot higher. I think what's going to happen is, you're going to see -- as we've seen in U.S. states that have legalized it in this country, in Colorado, Washington State, you've seen a marginal increase in cannabis usage, but the supply has gone through the roof. What happens generally, when that happens, is that prices come down. So, I think this is a pretty poor investment, and I think the market's recognizing it.

Hill: CEO Rob Sands from Constellation Brands said, "As people want to consume cannabis in a more sophisticated manner, beverages will become a more common delivery mechanism. We're not restricting ourselves to beverages just because we're a beverage company." 

Even if, directionally, he's right, the number still seems out of whack. It's the $4 billion number. And, to jump from a 10% stake to a 38% stake... We talked about this recently with Zillow, and how part of the sell-off last week with Zillow had to do with their acquisition of Mortgage Lenders of America, and Zillow not having the greatest track record, in terms of acquisitions. I'd argue the same thing with Constellation Brands. They paid $1 billion for Ballast Point.

Argersinger: [groans] A huge premium. And, then, by the way, that happened two years ago, roughly, what we're seeing now as what could have been the peak of craft beer. That was a big price to pay.

Hill: And you look at their portfolio of brands, sure, they have some recognizable brands, but it's not like a Murderers' Row of beer, wine, and spirits.

Argersinger: That's the thing, too. You're adding Canopy Growth. There are no established brands in the cannabis industry! What are you really adding here? I think what they're doing is, they're picking what they think is going to be the leader in this young market. Maybe they're being a little forward-thinking, but it's going to be so hard. You're investing in a commodity product, there's no doubt about it. I don't think consumers are going to distinguish between a Canopy Growth-branded version of pot vs. another company's. They're spending a huge amount of money to do this. I don't think the returns are going to be very good with this one.

Hill: We haven't really talked about international investing on this show in a while. I wanted to touch on this. We were going back and forth on Slack this morning. Certainly, Turkey has been in the headlines, Russia, China, as well. We're seeing this divergence. We're seeing the S&P 500 close to an all-time high. We're seeing the MSCI All World Index -- which includes the U.S. -- down about 8% year to date. I'm wondering, as an investor, when you look at both emerging markets and developed markets outside the United States, what goes through your mind?

Argersinger: Credit to Riva Gold, this was an article in The Wall Street Journal today that caught my attention, talking about how it's interesting that the U.S. markets -- I know we're down a little bit today, but we're within a few percentage points of all-time highs. But, if you look outside the U.S., it has been a rough market, to the point where there are legitimate bear markets in a lot of regions around the world. We talked about Turkey, but look at China, for example. The Shanghai Composite Index in China is down about 25% this year. The MSCI China Index, which actually includes a lot of foreign-listed China listed companies, many that we know here in the U.S. on the U.S. exchanges, it's had a similar fall from its high, about 25%. 

A lot of people are focusing on some of the headlines right now, the trade tariffs, the fact that there's a trade war, there's countries retaliating against the U.S., U.S. imposing tariffs on steel and aluminum, things like that. The real part of the story here, though, that I think might be missing from the headlines is that what's happened here in the U.S. is Treasury rates have risen. Obviously, the Fed has been raising rates. You can now get a roughly 3% yield on the 10-year treasury, which is the benchmark. 

You have the U.S., which now has relatively compelling, risk-free yields. What that does, especially to emerging markets, is it causes capital to flow out of those countries and comes to the U.S. It's safer, you get a high yield. Why am I going to get a possibly lower yield in a place like Portugal, when I can get a 3% yield in the U.S. and it's a lot safer? That's the dynamic that's playing out. 

A lot of these countries, unfortunately, have been reticent to raise their Central Bank rates. Turkey is the latest example. That causes yet more capital flight, it causes inflation, while they're trying to hold down the rates, the currency depreciates, it exacerbates the situation. That's causing a lot of capital to flow back to the U.S. I think that explains some of the relative outperformance we're seeing.

Hill: And, by the way, not to say there aren't great individual companies and businesses in some of these countries. But for a lot of people who, when they initially think about investing internationally, particularly if they're working with a financial advisor, a lot of times, one of the first solutions that's offered to them is some sort of an ETF or index. It's like, "This way, you get broad exposure to the entire Chinese market." You know what? Broad exposure isn't always great.

Argersinger: No. If we just stick with the China theme for a second -- here are some companies that we know and talk about a lot here at The Fool: Baidu, down 22% year to date; Alibaba, down 20%; JD.com, down 25%; Tencent, down 20%. These are big losses in companies that are not fly by-night companies. These are some of the biggest online platforms, massive customer bases, that we have in the world. And they've gotten crushed.

Hill: Sticking with those examples, do you look at them as examples of being oversold? Do you look at some of them and think, "Boy, if that stock is on a 25% sale, I might have to pick up a couple of extra shares!"

Argersinger: I think the valuations are getting to a point where they look very compelling. Especially, a lot of this is because of the prevailing U.S.-China tensions that are going on right now. But it's not like these companies are trading back and forth between the U.S. These are mostly domestic-focused Chinese companies that dominate their industries.

Hill: Shout-out to Sam Muffley, longtime listener in Queens, New York. Sent a story through Twitter. Interesting story in The New York Times about the private markets. They're getting a little frothy. The benchmark of, boy, if you could raise $100 million in the private markets, that was seen as such a big deal. Now, it's kind of commonplace.

Argersinger: Yeah. I think Sam is definitely onto something. I read the article, and I was astounded by the number. You mentioned the $100 million deal, which they call "megarounds" in venture capital speak. There were 273 of those last year. This year, through the first seven months, there have already been 268. 268 companies have raised $100 million rounds in the private markets. That's astounding to me. And it does beg the question, if there's that much money slugging around in the private markets, why would I ever go public? If there's that much money available to me? It's astounding.

Hill: I think, for people who are looking to the private markets, anticipating the prospect of companies going public, one, if they do, they're less likely to go public at a cheap valuation. And, to your point, I think they're just less likely to go public.

Argersinger: To the larger point, it makes me think -- and I think it's what Sam's alluding to -- there's a lot of money out there in general. There's obviously a lot of great opportunities in the private markets, but I can guarantee you, many of those megarounds have gone to companies that will never reach any kind of sustainable profitability. We probably won't even ever hear from them. That's money lost. 

The point is, being a public company is costly, it's time-consuming, it's resource-intensive. But it provides a healthy amount of scrutiny to a lot of companies, in terms of transparency, do you have a plan to be profitable, we're keeping tabs on you, we want to hear from management, we want to hear what's going on with the company. A lot of these companies can just avoid that right now. And it stinks for us as individual investors in public equities, because the inventory of stocks, as we've talked about, is declining.

Hill: This ties into a thought that I had last week when I saw the story about Jeffrey Katzenberg and Meg Whitman teaming up to unveil a new video streaming service. The headline was, "Jeffrey Katzenberg and Meg Whitman video streaming service, and they've raised $1 billion for this!" I saw that, and I thought, "I would think, given the success that Meg Whitman and Jeffrey Katzenberg have had in their respective careers, they could raise $1 billion for just about anything." I'm not going to get excited about a video streaming service that's brand-new because $1 billion was raised by those two people.

Argersinger: Yeah. It's amazing. It's like, "You had me at Katzenberg, so here's my check." It's amazing what's happening.

Hill: We were talking earlier about the business of alcohol. Here's the best story about the business of alcohol -- Bud Light is giving away free beer in Cleveland, Ohio. There is a catch, however. The company has placed what's being referred to as "victory fridges" at 10 different bars in Cleveland. The fridges are filled with bottles of Bud Light, and they are locked. They will be unlocked when the Cleveland Browns win a game. If you're not a fan of the NFL, then you're probably unaware of the fact that it has been a very long time since the Cleveland Browns have won a regular-season game. In fact, it was late December 2016. I love this move by Bud Light.

Argersinger: I like it a lot, too. And I have to say, as a Patriots fan -- and I know you are -- I hope this happens in week three, when the Jets come to town, and Cleveland can actually win that game. [laughs] 

Hill: That's the thing, I look at Cleveland and I'm like, they're not going 0-16 this season.

Argersinger: No, I think they're going to win a few games. Starting maybe with week three, against the Jets. I love it. My question is, though, when does this happen? If you're at the bar, and, it's amazing, Cleveland is up by 14 points. There's two minutes left. Is it like, all of the sudden, everyone's crowding around this fridge? And the bar owner is over there, watching the clock? [laughs] I feel like it's going to be a frenzy!

Hill: Yeah, probably. I should probably look at a map of where these are. I think they're spread out throughout the general Cleveland area. I hadn't really thought about that. First of all, they're going to be unlocked when the game's over. It's not, "We have a lead!"

Argersinger: Oh, no! Of course.

Hill: But, then, I think there would need to be some generally agreed-upon decorum. Of course, keeping in mind that these will be euphoric fans who have been drinking for several hours anyways. You know what? Here's the thing, we're probably going to see video footage of this when it happens.

Argersinger: I cannot wait.

Hill: Matt Argersinger, thanks for being here!

Argersinger: Thanks, Chris!

​Hill: ​As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!