Better Marijuana Stock: Canopy Growth vs. Constellation Brands

Pure-play pot stock or its big partner? Here's which stock looks more attractive over the long run.

Keith Speights
Keith Speights
Jul 14, 2019 at 7:33AM
Health Care

Constellation Brands (NYSE:STZ) first rocked Canopy Growth's (NYSE:CGC) world in 2017 by buying a 9.9% stake in the Canadian cannabis producer. A year later, Constellation made an even bigger impact with a $4 billion investment in Canopy. The big alcoholic beverage maker now has enough sway over Canopy Growth that it was able to boot founder and former CEO Bruce Linton out the door earlier this month.

But while Constellation Brands and Canopy Growth are joined at the hip, the reasons to buy the stocks aren't exactly the same. Which is the better pick for long-term investors? 

Giant marijuana leaf in a shopping cart

Image source: Getty Images.

The case for Canopy Growth

There's really only one big reason why Canopy Growth could be the better choice over its partner: A much greater growth opportunity. As a pure-play marijuana stock, Canopy Growth is poised to benefit more over the long run if the global cannabis market expands like many think it will.

Some investors might be tempted to focus heavily on Canopy's lackluster performance in its last quarterly update. That's a mistake. Canopy Growth's revenue wasn't as high as hoped primarily because of supply constraints. But low capacity is only a temporary problem.

Canopy Growth ranks as the leader in the Canadian adult-use recreational pot market and will likely remain at the top. The company should be in a great position as the second phase of this market opens later this year with cannabis derivatives including beverages, edibles, and vapes becoming available.

International medical cannabis markets present another huge opportunity for Canopy Growth. Although the company trails Aurora Cannabis in international sales, it's still a major player in Europe, South America, and Australia. As these markets mature, Canopy Growth's revenue will increase dramatically.

Then there's the U.S. Canopy Growth is arguably in the best position of any Canadian cannabis producer to reach the huge U.S. market. It's building a large-scale hemp production facility in New York state with hemp CBD products expected to hit the market by the end of this year. Canopy's deal to buy the right to acquire U.S.-based cannabis operator Acreage Holdings as soon as federal laws permit also puts the company in the catbird's seat to enter the U.S. marijuana market.

The main drawback for Canopy Growth is that it remains unprofitable. However, it seems likely that the company's next CEO will focus on mapping out a clear path to profitability. And Canopy is already on track to generate positive earnings before interest, taxes, depreciation, and amortization (EBITDA) with its Canadian operations next year.

The case for Constellation Brands

Why buy Constellation Brands stock? First, it has a strong core business in alcoholic beverages. Second, it also should have tremendous growth prospects in the global cannabis market thanks to its 38% ownership of Canopy Growth.

Constellation continues to dominate the premium beer market in the U.S. with its Corona and Modelo brands leading the way. The company's products generated 40% of the growth in the U.S. high-end beer category last year. Even more impressive, Constellation's beers basically accounted for all of the growth in the import segment of the market.

Some might point out that Constellation hasn't fared so well with its wine and spirits products. However, the company is selling over 30 of its wine and spirit brands to E. & J. Gallo. This deal should enable Constellation to focus its attention on higher-profit brands. It will also bring in a cool $1.7 billion in cash.

Because of its stake in Canopy Growth, Constellation should reap the rewards from rapid growth in cannabis markets across the world. But won't Canopy growth even more? Yes. However, Constellation owns warrants that allow it to gain a majority interest in its partner. You can bet that it will exercise those warrants if the global cannabis market explodes.

While Canopy Growth isn't profitable yet, Constellation ranks as one of the top two most profitable marijuana stocks on the market. Don't let the company's loss in Q1 fool you. Constellation Brands would have reported a nice profit were it not for the negative impact of Canopy Growth's results.

Constellation's strong financial position enables it to pay an attractive dividend as well. The dividend currently yields 1.5%. With a payout ratio of less than 24%, Constellation should be in a good position to increase its dividends in the future. 

Better marijuana stock

I'm not nearly as down on Canopy Growth as some investors seem to be right now. My view is that the company's long-term prospects remain very good. But if I had to choose only of these stocks to buy, it would be Constellation Brands.

My thinking is that if the cannabis opportunity proves to be really attractive, it's likely that Constellation will fully acquire Canopy Growth. And if the cannabis market doesn't grow as quickly as hoped, Constellation's alcoholic beverages business gives it a hedge that Canopy doesn't have. 

Constellation Brands has a long and successful track record in rewarding shareholders. The company's management team knows what it's doing in the U.S. alcoholic beverages market. And with its stake in Canopy Growth, Constellation has a cannabis lottery ticket that could pay off in a huge way.