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 (CGC 1.92%) 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 (STZ +1.31%) -- 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.
Image source: Constellation Brands.
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.
Check out the latest Canopy Growth and Constellation Brands earnings call transcripts.
Growth prospects and risks
Because of the partnership, Canopy's growth helps Constellation as well, but investors in Constellation have to consider the beer giant's other growth prospects. Corona and Modelo have been cash cows for Constellation in recent years, and the company's done a good job of using their popularity to avoid the downturn in the beer market that many of its competitors are facing. There's room for some overlap between the two partners' businesses, as Constellation wants to explore the potential of cannabis-infused beverages as a growing market. Yet elsewhere, Constellation is having to deal with a slowdown in its wine and spirits businesses, and the company had to cut its profit guidance for the full year because of the weakness in its non-beer operations.
Meanwhile, Canopy is still at the beginning of what will be a fast growth trajectory for the foreseeable future. In its most recent quarterly result, the cannabis company saw revenue nearly quadruple from year-earlier levels, with cannabis sales volumes topping the 10,000 kilo mark on the strength of the rollout of recreational cannabis in Canada. Canopy did a good job of keeping its pricing power intact, especially in the medical marijuana market, and an emphasis on cannabis-derived oils helped pay off not just financially but also in building brand awareness. Perhaps most importantly, Canopy took quick advantage of the legalization of hemp in the U.S., announcing plans to build a $150 million facility in upstate New York for hemp production. That could give Canopy a vital foothold in the U.S. market, and if federal law eventually makes marijuana legal, that could be a key edge for Canopy to exploit.
At this point, if you're interested in investing in cannabis stocks, Canopy Growth looks like the better pick over Constellation. With the beer industry seeing pressure, Constellation's core businesses could be on shaky ground. If you're buying Constellation for its holdings in Canopy anyway, it makes sense just to concentrate on the Canadian marijuana stock itself -- perhaps investing a smaller overall amount to reflect its concentrated effect.
