Better Buy: Canopy Growth vs. Constellation Brands

For investors seeking to profit from the legal marijuana industry, the choice between Canopy Growth (NYSE:CGC) and Constellation Brands (NYSE:STZ) presents a unique conundrum. Since the Corona distributor owns about 40% of the Canadian pot grower, deciding between the two is essentially a question of whether you’d rather own a piece of a pure-play marijuana business or a diversified alcohol company that also has significant exposure to the marijuana industry.

As you can see from the chart below…

while Canopy has had some more pronounced ups and downs, both stocks are trading below where they were on Aug. 15, 2018, when Constellation announced it was upping its stake in Canopy to 38%. But where do they stand, today, and which one now holds more potential to reward shareholders?

STZ Chart

STZ DATA BY YCHARTS

Losing that high

Marijuana stocks widely have fallen since Canada legalized pot for recreational use a little more than a year ago. In typical buy-the-rumor/sell-the-news fashion, high hopes and valuations have run up against hard realities, with a number of sector headwinds including regulatory issues and accounting errors coming into play. Canopy is no exception — its stock is down 57% since Oct. 17, 2018.

Nonetheless, in its latest earnings report, Canopy continued to show off strong growth. Net revenue jumped 249% to 90.4 million Canadian dollars as dried cannabis sales in the Canadian recreational market increased 94% sequentially, demonstrating that Canopy is quickly penetrating its home market.

Other metrics pointed to its rapid growth, including 183% sequential growth in kilograms harvested. However, the company is still clearly in its high-growth investment phase, as it posted an operating loss of $123 million.

Earlier this year, Canopy also ousted co-CEO Bruce Linton, who had done much of the work that built the company. Among other things, he forged brand partnerships and secured the deal with Constellation. His removal was a sign that its losses had gotten deeper than some investors, including Constellation, could stomach.

Canopy has long been the largest pot company by market cap, but it faces the same fundamental challenges that many of its peers do — differentiating itself and its products in a commoditized industry, and ultimately turning a profit. Though its Tweed brand is well recognized, Canopy, like the rest of the pot industry, still represents a significant risk. While the company’s valuation seems more reasonable after the recent slide, it’s still likely to burn cash for the foreseeable future as it expands. Considering the recent negativity in the sector, it may be hard for Canopy to bounce back until investor sentiments change broadly, or a catalyst like…

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