There's a pretty good chance that 10 years from now Aurora Cannabis (ACB) and/or Constellation Brands (STZ -1.13%) will be worth a lot more, thanks to growth in the global cannabis market. Aurora is already a top marijuana stock. Alcoholic beverage maker Constellation is sort of a marijuana stock as well by virtue of its 35% stake in Canopy Growth (CGC -1.25%).

Both Aurora and Constellation turned in dismal performances in 2018. So far this year, though, Aurora is on fire with its share price nearly doubling, while Constellation has eked out a small gain. Which of these two stocks is the better buy now? 

Overhead view of glass full of a liquid with a cannabis leaf floating in it and part of a cannabis plant close to the glass.

Image source: Getty Images.

The case for Aurora Cannabis

The investing thesis for Aurora Cannabis boils down to three assumptions. First, the legal cannabis market is going to be enormous. Second, the primary keys to success in the cannabis market are capacity, distribution channels, and low operating costs. And third, Aurora is positioned to be an industry leader in all three of those keys to success.

As for the first assumption, over 30 countries have legalized medical cannabis. In the U.S., 33 states have legalized medical cannabis, with 10 also allowing the legal use of recreational pot. Although marijuana remains illegal at the federal level, signs are increasingly pointing toward the possibility that those laws could change in the not-too-distant future. Most of the international and U.S. state marijuana markets are only in their early stages, so there's a lot of room for growth.

The second assumption appears to be reasonable as well. No company can sell a product it doesn't have, so production capacity is critical. Even if a company has ample supply, it must have outlets to which it can sell the products.

That leaves the third assumption, which also seems pretty sound. Aurora stated in its second-quarter update in February that it expects to have an annual production run rate of more than 150,000 kilograms by the end of this month. The company, however, projects to boost its capacity to over 500,000 kilograms per year by the middle of 2020. And that amount doesn't include the additional impact from Aurora's acquisition of ICC Labs. In a nutshell, Aurora is clearly on track to be the No. 1 marijuana producer in the world in terms of annual production capacity.

What about distribution channels? At home in Canada, Aurora's distribution network covers 98% of the country's population. In the last quarter, Aurora captured roughly 20% of the Canadian recreational marijuana market. Aurora is also a leader in international medical marijuana markets with a leading market share in Germany and operations in 22 other countries.

Aurora's operating cost structure isn't leading the industry right now. In its fiscal Q2, the company's cost per gram produced actually increased from the previous quarter. However, Aurora expects to drive its costs down by leveraging its massive scale and by using automation and improved genetic strains of cannabis.

Check out the latest earnings call transcript for Canopy Growth and other companies we cover.

The case for Constellation Brands

With Constellation Brands, investors must look at the company's opportunities in its core business of marketing alcoholic beverages as well as in global cannabis markets. While many beer makers have struggled in the U.S., Constellation's premium beers have succeeded, beating the overall U.S. beer market in sales growth by a double-digit percentage margin.

Constellation should enjoy even more growth from its launches of new products. In particular, momentum is likely to pick up for the company's Corona Premier, Corona Familiar, and Modelo Especial beers. Constellation President and CEO Bill Newlands said in the company's Q3 conference call in January that the launch this year of Corona Refresca flavored beers could "be over 80% incremental to our core franchise and will bring new customers into our business."

However, the company's wine business has been a weak spot. Sales growth has been relatively sluggish. Constellation could have a remedy, though. It's reportedly in discussions to sell several of its low-end wine brands to E. & J. Gallo Winery. This could enable the company to focus more heavily on its faster-growing premium wine brands.

Constellation placed a big bet on cannabis, investing $4 billion in Canopy Growth in 2018. To understand Constellation's opportunities in the market, therefore, requires an understanding of Canopy's industry position. Most of what we saw with Aurora also applies to Canopy Growth.

Canopy is on track to have an annual production capacity of more than 500,000 kilograms. It claims the most extensive supply agreements in the Canadian recreational marijuana market and captured around 30% of the market in the last quarter. Constellation and Canopy are gearing up to launch a variety of cannabis-infused beverages as soon as Canada's market for the products opens for business.

Internationally, Canopy runs neck and neck with Aurora in most areas of the world, including Europe. But Canopy appears to have an advantage over Aurora in the U.S. hemp market. In January, Canopy announced that it had secured a hemp production license in New York state, where it plans to build a large-scale hemp production facility. 

It wouldn't be surprising for Constellation to exercise its options to gain a controlling interest in Canopy in the future. If the global cannabis market grows as much as some think, Canopy Growth could even become a bigger part of Constellation's business than beer down the road.

Better buy

Both of these stocks could be big long-term winners. But I think Constellation Brands is the better pick.

Constellation is definitely in better financial shape than Aurora. The company is quite profitable, whereas Aurora isn't consistently profitable yet. Constellation pays a dividend with a not-too-shabby yield of 1.73%. It's also valued at a level that doesn't cause the heart palpitations some investors might get looking at Aurora. 

Overall, I think Constellation Brands is a great way to profit from the cannabis boom and the rising demand for premium beers and other alcoholic beverages in the U.S.