Investors are flocking into marijuana stocks, but they've sought different ways to profit from the space. Some prefer to invest directly in companies that cultivate and grow marijuana, such as Aurora Cannabis (NYSE:ACB). Others are less comfortable with pure-play companies in the space, instead looking at companies like Constellation Brands (NYSE:STZ), which has a broader beverage business outside the cannabis space but has made massive investments in cannabis-focused company Canopy Growth.

A more diversified business like Constellation offers protection if the marijuana sector proves to be overhyped, but it also has more limited upside than Aurora does if cannabis takes off. With that in mind, though, you can evaluate both Aurora and Constellation to decide which stock offers the better potential trade-off between risk and reward going into 2019.

Marijuana leaf on top of a pile of $100 bills.

Image source: Getty Images.

Valuation and stock performance

Neither Constellation Brands nor Aurora Cannabis has done particularly well lately. Constellation stock has fallen 28% in the past year, but that's actually a bit better than Aurora's losses of 32% since January 2018.

For valuation purposes, the trouble with comparing Aurora with Constellation is that only one of the companies is profitable. The beverage-giant's trailing earnings are skewed somewhat by the impact of tax reform, but when you look at near-term future projections, the stock trades at about 16 times forward earnings. By contrast, Aurora trades at 90 times its trailing revenue over the past 12 months, showing the extremely high premium that investors are putting on the marijuana stock because of its growth potential.

Some would argue that trying to judge between these two stocks, based on valuation, isn't the appropriate way to compare their businesses. But if valuation means something to you, then Constellation's share price looks a lot more reasonable -- even if it means giving up some of the potential upside from purer-play cannabis exposure.

Partnerships

To succeed, many marijuana producers have teamed up with companies outside the industry to gain expertise in areas like marketing and distribution. That's been Constellation's approach to the space, making a huge  $4 billion investment in Canopy Growth last summer. The move gives Constellation a stake of between 35% and 40% in Canopy, along with the right to take a majority stake if it chooses to exercise warrants it obtained in the deal.

So far, Canopy hasn't been able to avoid the share-price declines that have plagued the entire industry, and that's reduced the value of the investment that Constellation made in the company. Yet for Constellation investors, it doesn't really matter whether Canopy ends up developing cannabis-infused beverages. Even if the marijuana company focuses mostly on cannabis-derived oils and dry marijuana production, which doesn't really dovetail with Constellation's beverage business, the spirits maker will still stand to benefit from its investment if Canopy can find future success.

Thus far, Aurora hasn't attracted firm offers from any major consumer companies. For a time, it looked like soft-drink giant Coca-Cola might consider an investment in Aurora that might have looked similar to Constellation's stake in Canopy, but reported talks didn't result in a deal. That doesn't necessarily shut the door on a future proposal, but for now, Aurora's content going it alone and taking full advantage of the opportunities in front of it.

Growth prospects and risks

In terms of growth, both Constellation and Aurora have a lot going for them. Even outside its exposure to cannabis through its stake in Canopy Growth, Constellation still is benefiting from the success of its Modelo and Corona beer brands, which it has turned into key profit drivers in the U.S. beer market. Overall, the beer market has been fairly weak, but Constellation's been able to hold its own by distinguishing its major high-end products from the lower-end beverages that key competitors sell.

Identifying cannabis-infused beverages as a threat to beer, Constellation hopes to get a head start in penetrating what could become a huge addressable market over the next 15 years. With a market cap of about $30 billion, Constellation's stake in Canopy is only a small part of its overall business, but having that growth ace in the hole could be a smart strategic move if beer's popularity deteriorates.

For Aurora Cannabis, growth in marijuana production capacity is the main attraction for investors. The company has been adding operational greenhouse space and has more projects in the planning stage, and it could cement its position as one of the peak producers in the industry within the next few years as more space comes online. The company also has developed expertise that it can use to get business from peers in the industry, such as its Larssen greenhouse design and construction division. Yet Aurora isn't consistently profitable and its financing of acquisitions often has relied on dilutive equity offerings that hurt existing shareholders.

Right now, Constellation Brands looks like a better buy in the marijuana space than Aurora Cannabis. With diversified business exposure and a big stake in one of the leading players in cannabis, Constellation gives investors the best of both worlds -- at a price that's currently quite attractive.

Check out the latest Constellation Brands earnings call transcript.