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Constellation Brands Just Upped Its Stake In Canopy Growth. Here's Why The Pot Stock Is A Buy

By David Jagielski – May 10, 2020 at 8:46AM

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The beer maker now has a 38.6% stake in Canopy Growth.

Constellation Brands (STZ -1.45%) has given Canopy Growth (CGC 22.15%) a renewed strong vote of confidence. On May 1, the company known for its Corona beers announced that it would be exercising warrants which would give Constellation a 38.6% stake in the cannabis company. That's well up from the 9.9% ownership that Constellation had back in 2017 when it first invested in the Canadian marijuana producer. In 2018, it invested another $4 billion into Canopy Growth.

While a greater stake means that Constellation will have a larger share of Canopy Growth's profits and losses moving forward, it also suggests something else for the cannabis company's investors: greater stability.

Canopy Growth is a much different company than it was a year ago

Constellation hasn't always been happy with its cannabis investment. After all, Canopy Growth's recorded losses in four straight quarters totaling a combined 2.1 billion Canadian dollars, weighing down Constellation's own results in the process. The cannabis producer's difficulty in getting to breakeven is likely one of the reasons why Canopy Growth's co-CEO Bruce Linton was fired nearly a year ago.

But since Constellation's former CFO David Klein has taken the helm at Canopy Growth, there's been less focus on expansion and more emphasis on cost control and reaching profitability. That was evident in April when pot producer said it was exiting markets in Africa and scaling back its footprint Latin America. Canopy Growth's also been laying off staff and on April 29, investors learned that another 200 jobs would be cut from its operations, in addition to 85 jobs it said it would cut earlier in the month. In March, Canopy Growth also announced it was shutting down two greenhouses and slashing 500 jobs.

Cannabis logo on top of a map of Canada.

Image source: Getty Images.

Klein made it clear that growth alone won't be the priority for the company, and that Canopy Growth is going to be much more selective in which opportunities it pursues. In the press release announcing the latest job cuts, the new CEO said, "For a long time Canopy has prioritized doing things first, but going forward we'll be focused on doing things the best in the markets and in the product formats that show the greatest promise."

With Constellation upping its stake in the company after these moves, it's a great show of confidence that it believes in the approach the cannabis producer is taking compared to where it was a year ago. And despite the focus on cost reduction, that doesn't mean that Constellation isn't excited about the growth opportunities that are still out there. Constellation CEO Bill Newlands stated that "While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial."

Why Canopy Growth is the safest pot producer to invest in today

Its partnership with Constellation is the one advantage Canopy Growth has over its peers as many cannabis companies don't have a partner with strong capital resources. And with Canopy Growth's partnership with Constellation strengthening as a result of Constellation exercising its warrants, Canopy Growth's investors should be much more at ease. That's because Constellation now has even more incentive to support the pot producer in any way possible.

Investors can rest assured that the days of Canopy Growth being overly aggressive with expanding all over the world are long gone. With Constellation's former CFO at the helm and the beer maker having a greater stake in the Canopy Growth, there's little doubt that the marijuana giant's operations will be much more disciplined with profitability always in mind. Sacrificing some potential growth opportunities for the sake of better margins and cash flow is something many cannabis investors favor today, especially given the risk involved in the industry.

Over the past 12 months, the Horizons Marijuana Life Sciences ETF has fallen by 69% and Canopy Growth hasn't done much better, down 68%. It may be a while before Canopy Growth's stock will start to rally and it likely won't be until investors see some tangible evidence that the moves the company is making are translating into stronger earnings numbers. But with Klein continuing to cut costs and Constellation playing an even bigger role in Canopy Growth's long-term future, there's plenty of reason to be optimistic and why now may be a great time to invest in the popular pot stock.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
$232.52 (-1.45%) $-3.43
Canopy Growth Stock Quote
Canopy Growth
$3.75 (22.15%) $0.68

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