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7 Events That Shaped Canopy Growth's 2018

By Sean Williams – Dec 10, 2018 at 3:21AM

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This helps to explain why Canopy is the largest marijuana stock by market cap.

This was a groundbreaking, yet overall odd, year for the marijuana industry. On one hand, Canada became the first industrialized country in the world to legalize recreational pot in October. By the beginning of the next decade, it's not out of the question that the legal Canadian weed industry is bringing in $5 billion or more in added annual sales.

On the other hand, marijuana stocks themselves performed quite poorly. With the exception of a two-month rally leading up to the Oct. 17 legalization in Canada, pot stocks have predominantly been mired in a downtrend this year.

An up-close view of a cannabis plant growing in an outdoor farm.

Image source: Getty Images.

The seven key events that defined Canopy Growth's fantastic year

But while the Horizons Marijuana Life Sciences ETF has sunk nearly 30% through Dec. 5, the largest publicly traded pot stock in the world, Canopy Growth (CGC), gained 21% over the same stretch. Let's take a closer look at the seven most important events that shaped Canopy Growth's 2018 to better understand how it was able to vastly outperform its peers.

1. Constellation Brands' massive equity investment

There's little denying the elephant in the room: Constellation Brands' (STZ) $4 billion equity investment in Canopy Growth. As announced in mid-August, the maker of Corona and Modelo beer agreed to purchase 104.5 million shares of Canopy's common stock at a 51% premium to its prior-day closing price. In return, it received a 37% equity stake in the company – this was actually Constellation's third investment in Canopy – as well as 139.7 million warrants that could allow Constellation to up its stake in Canopy above 50%, if exercised.

Although this duo will undoubtedly work on cannabis-infused beverages, which are all the rage, Constellation went far above and beyond creating a simple partnership here. By handing over more than $4 billion in cash since October 2017, Constellation Brands has demonstrated a clear belief that legal cannabis can be a long-term growth driver for its company.

As for Canopy, it now holds more than $4 billion in cash on hand, which it'll be using to complete is capacity expansion, expand into new markets, develop new products, market and brand those products, and make acquisitions.

Two businessmen in suits shaking hands, as if in agreement.

Image source: Getty Images.

2. The acquisition of Hiku Brands

Speaking of acquisitions, Canopy Growth made two very notable purchases in 2018. The first was the buyout of Hiku Brands for $269 million Canadian, which was announced on July 10. It was undoubtedly a steep price to pay for a company with a relatively small retail presence in Manitoba, and licensing applications in Newfoundland and Alberta when the deal was announced. But this was about much more.

The real impetus for the acquiring Hiku Brands was to add well-known brands to Canopy's growing product portfolio. It signified a transition from rampant capacity expansion into the next phase of the maturing marijuana industry: brand building. Hiku gave Canopy access to the popular, upscale Tokyo Smoke shops, as well as DOJA and Van der Pop. It could take time before Canopy realizes a return on its purchase of Hiku, but it appears to be a necessary step toward engaging the public and creating a loyal base of customers. 

3. The purchase of ebbu

The second notable acquisition was announced just two days before Canada legalized recreational weed in October. The predominantly share-heavy cash-and-stock deal would see Canopy Growth acquire the assets of Colorado-based hemp research company ebbu for approximately CA$425 million.

Why's this notable? For starters, ebbu's intellectual property can be applied at Canopy's hemp growing operations in Saskatchewan, which would dramatically lower the company's cannabidiol production costs.

More importantly, though, it gives Canopy Growth a means of getting its foot in the door in the U.S. market, without directly targeting recreational cannabis, which is still illegal in 40 out of 50 states, and at the federal level in the United States. Acquiring ebbu should allow Canopy to build relationships and trust within the U.S., which could come in very handy should the federal government ever change its tune on pot. 

Two rows of dried cannabis buds partially covering neatly arranged rows of hundred dollar bills.

Image source: Getty Images.

4. The Canopy Rivers spinoff

Another exciting development was the spinoff of Canopy Rivers (CNPO.F) in September.

Previously a subsidiary of Canopy Growth, Canopy Rivers primarily focused on being a financial partner for cannabis growers. It would provide up-front capital in exchange for a percentage of a growers' yield, and would pay a below-market price for this yield, of course. Streaming deals still remain a core part of Canopy Rivers' operations today. 

However, as a separate entity, Canopy Rivers offers the potential to bring new pot companies into the Canopy Growth universe. Make no mistake about it, Canopy Rivers is still indelibly linked to Canopy Growth. Therefore, any deals struck by Canopy Rivers could just as easily provide an investable or operational benefit to Canopy Growth.

5. Hitting 4.3 million square feet in licensed capacity

Although it wasn't an announced event, the company's second-quarter operating results on Nov. 14 noted that it now had 4.3 million square feet of licensed production capacity in Canada. The company anticipates increasing this to 5.6 million square feet, which would yield an author-estimated 500,000 kilograms of cannabis per year at peak production. 

What's particularly notable about this milestone is that Health Canada, the regulatory agency overseeing the approval or rejection of cultivation licenses and sales permits, has been absolutely bogged down by applications. It's typically been taking months, or even years, to receive approval for cultivation applications, with Marijuana Business Daily reporting in May that sales permits were taking an average of 341 days to be issued. The fact that Canopy Growth already has more than three-quarters of its capacity licensed for production is phenomenal.

A number of clear jars filled to the brim with dried cannabis buds on a counter.

Image source: Getty Images.

6. Landing 70,000 kilograms in annual supply deals

Once again, not a specific event, but rather a conglomeration of multiple events, was the company's announcement in its second-quarter operating results press release that it had 70,000 kilograms of aggregate annual provincial and territorial supply deals in Canada. My guestimate is that this is close to 15% of its annual peak production.

The importance of these supply deals is that it creates a guaranteed channel of cash flow each year. Rather than having to guess where the company will attempt to unload its production, approximately 15% of it will be accounted for, at minimum, each year. That's great news for the company and its shareholders.

7. The first medical cannabis export to the U.S.

Lastly, Canopy Growth made history on Oct. 9, when it completed the first legal medical cannabis export from Canada to the United States.

As a refresher, many of the large Canadian growers are counting on legal foreign markets to gobble up excess production. Ergo, exports could easily account for half of all sales, if not more, for Canadian pot stocks. Shipping to the U.S., though, isn't allowed. That's because the federal government continues to view the drug as wholly illegal. Canopy Growth being able to break down that initial barrier and ship cannabis into the U.S. creates a foundation from which, presumably, the sky is the limit. 

This list of events shows very clearly why Canopy Growth is the largest marijuana stock by market cap.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

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