Better Buy: Canopy Growth Corporation vs. Constellation Brands

Powder of Cannabis (Drugs), Analysis of Cannabis in laboratory.
Powder of Cannabis (Drugs), Analysis of Cannabis in laboratory.

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Canopy Growth Corporation (NYSE:CGC) and Constellation Brands (NYSE:STZ) are definitely joined at the hip. They’re partners with plans to market cannabis-infused beverages. Constellation owns 38% of Canopy thanks to its $4 billion investment in August. But they’re still different stocks.

Even with the big pullback over the last couple of weeks, Canopy’s share price is still up well over 50% in 2018. Constellation, meanwhile, is down year to date. Which of these stocks is the better buy now?

Overhead view of marijuana leaf in a glass with a beverage next to marijuana leaves.
Overhead view of marijuana leaf in a glass with a beverage next to marijuana leaves.


The case for Canopy Growth

Canopy Growth has two primary growth opportunities. One is the recreational marijuana market in Canada. The other is the global medical marijuana market.

You could make a strong argument that Canopy is positioned better than any other company in the Canadian recreational marijuana market. The company has 4.3 million square feet of growing space currently licensed for production. Canopy plans to add another 1.3 million square feet to that total.

Perhaps more important, Canopy has places to which it can ship the cannabis that it produces. The company has lined up supply agreements with every province that’s finalized supply plans. And those agreements aren’t for measly volumes. Canopy’s deals accounted for 36% of the total volume of all supply agreements between provinces and cannabis producers as of August.

The company will have to wait for a while before it and Constellation Brands can launch cannabis-infused beverages, though. Canada won’t finalize regulations for several types of cannabis products, including edibles and beverages, until next year at the earliest.

Canopy is also sitting pretty in international medical marijuana markets. The company’s Spectrum subsidiary operates in Germany, the biggest marijuana market outside of North America. Canopy also has subsidiaries in Denmark, the Czech Republic, Australia, Chile, Colombia, and Lesotho, as well as partnerships in other countries that either already have legalized medical marijuana or could soon do so.

It’s hard to overstate the importance of Canopy’s relationship with Constellation — and the cash that Canopy has as a result of it. Canopy has plenty of money to make strategic acquisitions that give it an even bigger head start over its rivals. Over the long run, the addressable market for Canopy could reach $100 billion — and perhaps a lot more. Canopy appears set to be a major player in this market and could generate solid returns for investors.

The case for Constellation Brands

To some extent, all of the positives for Canopy Growth also apply to Constellation Brands. That’s to be expected, since Constellation owns a big chunk of Canopy. However, Constellation’s core business still focuses on alcoholic beverages.

At first glance, you might think the alcohol business is going nowhere. For example, beer sales in the U.S. have been flat over the last 10 years. But the high-end and craft beer segments are enjoying growth. Constellation’s strategy is to lead the high-end beer market in the U.S.

The company already ranks as the No. 1 high-end beer company and the No. 1 imported beer company in the U.S. Overall, Constellation ranks as the third-largest beer company in the U.S. with brands including Corona, Modelo, and Pacifico along with craft beers Ballast Point, Funky Buddha, and Four Corners. Constellation’s beers are the most popular among Hispanics, one of the fastest-growing demographics in the U.S.

While Constellation’s strength lies in its beer business, the company is also targeting growth for its wine and spirits business. And again, its strategy is to be the leader in the premium market — where the growth is.

Constellation thinks that it can generate attractive returns from its wine and spirits business, with top brands like Kim Crawford and Black Box leading the way. The company also sees opportunities for making strategic acquisitions to fuel growth, an area where it has a strong track record.

As the company generates strong profits and cash flow, it hasn’t forgotten about its shareholders. Constellation pays a dividend that currently yields 1.35%. With a very low payout ratio, the company should easily be able to increase its dividend in the future.

Better buy

Canopy Growth has more room to run than Constellation does over the long term. That’s because the cannabis market is still in its infancy while the alcoholic beverage market is mature. Does that make Canopy the better pick? Yes and no.

My view is that Canopy is the better choice for aggressive investors. There are still a lot of risks for the cannabis industry. Canopy’s valuation reflects expectations of tremendous growth that could take longer than many hope. But over time, I think Canopy Growth will continue to be a big winner.

For more conservative investors, though, Constellation Brands is the smarter pick. Constellation is in great shape financially. It has a solid strategy to generate sustained growth. And it has an option to buy Canopy, which I suspect will happen sooner or later.

Buying Constellation stock gives investors a stake in a strong company with a way to also profit from the potential boom in global marijuana sales. That’s a win-win.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.