Constellation Brands (NYSE:STZ) looks like a classic example of being greedy when others are fearful. But despite the stock being down 31% in the last year, I’m staying away from this one.

Constellation Brands

it’s one of the largest US alcohol producers and marketers. And the industry as a whole looks as though it’s in a transition phase at the moment.

One of the biggest developments is the well-documented shift towards more premium products. This has been happening across beer, wine, and spirits. 

Constellation Brands isn’t oblivious to the ongoing changes. The company has been looking to position its portfolio to align with this trend by divesting some of its lower-priced lines.

This looks like a good strategy to me. But there’s another ongoing trend that looks more problematic, which involves beer and wine losing market share to spirits. 

That’s a problem for a firm where beer accounts for 85% of overall revenues. Despite growth in some of its premium divisions, the category as a whole being in decline is a big concern.

The Berkshire Hathaway investment managers might be seeing something, but I don’t know what that is.

Diageo

In the UK, Diageo (LSE:DGE) is also going to contend with challenges to the alcohol industry in general. These include the rise of GLP-1 drugs, which could well weigh on overall demand.

I think, however, the FTSE 100 firm has a more attractive portfolio for dealing with these risks. Its sales predominantly come from spirits, with smaller contributions from beer and wine.

The strength of Diageo’s spirits portfolio is well-documented. But even in its relatively minor wine division, the company is firmly positioned towards the luxury end of the market.

Through a joint venture with Moët Hennessy Louis Vuitton, Diageo has access to some of the top champagne names. These include Dom Pérignon, Moët & Chandon, and Veuve Clicquot.

Its beer division primarily consists of Guinness, which some analysts have speculated the firm might be looking to sell. But I don’t think this would be a particularly welcome development.

Guinness sales have been strong recently, underscoring the shift towards premium lines across categories. So I see the division as another reason to be optimistic about Diageo’s portfolio.

UK discount?

A lot of recent attention has been focused on UK shares trading at lower multiples than their US counterparts. But that’s not so obviously the case with Constellation Brands and Diageo. 

Despite a lower dividend yield and a higher price-to-earnings (P/E) ratio, Constellation Brands trades at a lower free cash flow multiple than its FTSE 100 counterpart. This means that — in one important respect — the stock is cheaper.

On balance, however, I think Diageo is in a stronger position to deal with the challenges the alcohol industry is facing. That’s why it’s the stock I’ve been buying for my portfolio.

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Investor interest in marijuana stocks reached a fever pitch as summer turned to fall, and the Oct. 17 legalization of recreational marijuana in Canada was a milestone event for the budding cannabis industry. Yet in what many market watchers referred to as a sell-the-news event, marijuana stocks retreated in the last half of October, and Canopy Growth (NYSE:CGC) finished the month with losses of 19%.

For those who had hoped that Canopy Growth’s stock would be a straight-up pathway to riches, October’s performance for the cannabis leader brought a cold dose of realism to their dreams. Yet in one way, there’s a silver lining to Canopy’s swoon, as it’ll make sure that key investment partner Constellation Brands (NYSE:STZ) remains dedicated to fostering the cannabis company’s growth and aligns shareholders’ interests with its own.

IMAGE SOURCE: CANOPY GROWTH.

Too far too fast

Constellation Brands has put more money into the marijuana industry than any other major mainstream company, supplementing a modest $190 million purchase of a 10% stake in the company in late 2017 with a massive investment of nearly $4 billion in August. Canopy investors at the time saw the move as reflecting the huge potential of the cannabis industry, and they were pleased that Constellation recognized its own ability to profit from Canopy’s growth. The marijuana company’s stock immediately roared higher, pushing out of the $20s to rise as high as the mid-$50s on several occasions in September and October.

However, the potential problem for new investors looking at paying those high prices for Canopy stock was that the structure of the Constellation investment created a potential conflict. In addition to paying 48.60 Canadian dollars per share for Canopy stock in August — roughly $37 per share in U.S. dollars — Constellation also got warrants to purchase additional shares of the marijuana company’s stock in the future. For the bulk of the warrants, Constellation got the right to pay CA$50.40 per share — or about US$38.50 — for up to 88.5 million additional shares of Canopy.

What that meant for investors was that as Canopy’s share price was soaring, the potential for future dilution was increasing. With the stock in the mid-$50s, would-be buyers had to deal with the prospect that Constellation would be able to pay roughly $16.50 per share less to take what would amount to a controlling stake in Canopy. And even though some of Constellation’s warrants were set to reflect the market price of the stock at the time it wanted to exercise them, the amount of dilution from the majority of Constellation’s warrants was an impediment.

A better place

Now, though, Canopy’s stock price aligns the interests of new shareholders with Constellation’s interests. At roughly $36.50 per share currently, Canopy’s stock price is low enough that it wouldn’t make sense for Constellation to exercise most of its warrants. Although that doesn’t eliminate the threat of potential future dilution, it does put those looking at Canopy stock for the first time on a more even footing with existing shareholders, including the beer giant.

Moreover, none of the decline in Canopy’s stock really came from any significant change in the company’s fundamental prospects. Canopy still has a commanding lead in cannabis production capacity, and it’s moving forward with plans to boost its output even further. The strength of the Tweed brand remains important for its long-term efforts to build market share, and exposure to international markets will make it easier for Canopy to take advantage of the trend toward legalization globally. As the market for cannabinoid-containing beverages keeps developing, opportunities for Constellation and Canopy to work together will likely broaden.

A price to keep in mind

Investors shouldn’t necessarily anchor on the exercise price of Constellation’s warrants as a firm line in the sand. The value of the warrants doesn’t go to zero just because the stock falls below the exercise price, as the three-year time span on the warrants gives Constellation the ability to profit from share-price gains even without directly owning shares.

However, for those looking at Canopy Growth stock for the first time, the fact that prices have fallen back to levels that Constellation contemplated as offering a reasonable opportunity for future investment is encouraging. Marijuana stock volatility isn’t likely to go away anytime soon, but smart investors interested in the space can take advantage of downward moves when they come to take a closer look at stocks like Canopy Growth.

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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? 

IMAGE SOURCE: GETTY IMAGES.

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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Investors are flooding into cannabis stocks, and plenty of companies that hardly anyone had ever heard of just a year ago have now become some of the best-known names in the marijuana space. Canada’s legalization of recreational marijuana has pulled stocks that operate north of the 49th parallel into the spotlight, and Canopy Growth (NYSE:CGC) has become one of the early-moving leaders of this budding industry.

Many think that Canopy Growth’s best days might well be behind it. After all, the stock has already seen shares jump more than 20-fold on the Toronto Stock Exchange since mid-2016, and it’s posted impressive gains in the few months that it’s traded on the New York Stock Exchange as well. But thanks in large part to a nearly $4 billion investment from Corona beer maker Constellation Brands (NYSE:STZ) as well as its own strategic vision for marijuana dominance, the future for Canopy Growth still looks bright.

IMAGE SOURCE: CANOPY GROWTH.

What Canopy can do on its own

Even before Constellation upped the ante by boosting its stake in the marijuana grower, Canopy had a number of things going for it that gave it a competitive advantage over most players in the industry. Canopy already has huge production capacity, having reported about 2.4 million square feet of licensed growing space for cannabis as of mid-2018. Moreover, the company is investing heavily in boosting production, with new greenhouses in key areas like British Columbia potentially more than doubling its square footage to a goal of 5.7 million square feet. Once fully online, that could bring Canopy’s dried cannabis production capacity into a range of roughly 450,000 to 500,000 kilograms, and that would leave it as either the industry leader or a close second based on current planned investments elsewhere in the sector.

Moreover, unlike many cannabis companies, Canopy was smart early on in recognizing the value of diversifying its geographical scope. Rather than simply building distribution networks in Canada, Canopy already has a presence in several foreign markets, and the ability to export cannabis gives the company the ability to avoid price challenges in its home market to find the best profit opportunities worldwide.

Canopy has also seen the importance of building a brand. The company’s Tweed line of products goes well beyond dried marijuana leaf to encompass growth areas like softgel capsules for cannabis-derived oils. And even under Canada’s plain-packaging laws, Tweed has the ability to develop a loyal customer base that will give Canopy the ability to market value-added products with higher margin levels than plain dried cannabis.

Canopy and Constellation

Yet the biggest vote of confidence in Canopy Growth has come from Constellation Brands. The alcohol specialist has made multiple investments in Canopy, starting with a nearly 10% stake a year ago for $190 million and then doubling down with its $3.8 billion deal this past August. Under the terms of the deal, Constellation not only boosted its interest in Canopy to 38%, it also gave itself the option to boost its stake in Canopy if it chooses to exercise its rights on warrants and convertible debt to accept additional shares of the marijuana producer.

The opportunities for Canopy and Constellation to collaborate have huge potential. A number of companies are already exploring the potential for beverages that incorporate various cannabis-derived oils, emphasizing both the positive health impacts of certain types of oils and the popularity of cannabis in general. Just as energy drinks reinvigorated a flagging market for traditional sugary carbonated soft drinks, so too could marijuana-containing beverages bring new interest to the industry.

Constellation also likely sees the collaboration as a defensive measure. Some cannabis advocates have played up the advantages of marijuana over alcohol. If consumers substitute cannabis for beer and spirits, then it’s useful for Constellation to have exposure to both industries — while still potentially leaving Canopy stock available for investors who want purer exposure to the cannabis sector.

A play on innovation

Finally, Canopy understands that it needs to foster innovation in order to stay ahead of the game. That’s a big part of why it funded the Canopy Rivers investment vehicle, and already, it’s found some lucrative investments that could pay off for Canopy Growth in the future.

Canopy Growth has already seen impressive gains for early shareholders, and it’s reasonable for investors to highlight both risks and potential rewards from investing in the stock. Yet from a fundamental business perspective, the best days for Canopy Growth lie squarely in front of it.

The post Why I think Canopy Growth’s best days are still ahead appeared first on The Motley Fool UK.

Like Godzilla rampaging through a city in a low-budget movie, the market meltdown among marijuana stocks has left plenty of carnage in its wake. Many marijuana stocks plunged 25% or more.

The good news is that in the midst of the mayhem, there are several stocks that look really attractive now. Three that stand out are Constellation Brands (NYSE:STZ), Liberty Health Sciences (NASDAQOTH:LHSIF), and Origin House (NASDAQOTH:ORHOF). Here’s why these are three marijuana stocks you might want to buy after the market meltdown.

IMAGE SOURCE: GETTY IMAGES.

1. Constellation Brands

Isn’t Constellation Brands an alcohol stock? Yes, but thanks to the company’s 38% stake in Canopy Growth, it’s now also a marijuana stock. And Constellation is arguably one of the best marijuana stocks to buy right now.

Although Constellation Brands’ share price fell during the broader market pullback, it’s still only down by a single-digit percentage point year to date. There are several reasons why the stock could be poised to rebound.

While the overall U.S. beer market hasn’t been much to cheer about in recent years, Constellation continues to generate impressive growth with its high-end and craft beers. The company’s Corona and Modelo brands rank as top preferences among Hispanics — one of the fastest-growing demographic groups in the U.S. Constellation’s strategy to solidify its lead as the country’s No. 1 premium beer company and expand its position in the premium wine and spirits market should pay off.

The company’s bet on Canopy should pay off, too. Constellation expects that the addressable global market for cannabis will top $230 billion within the next 15 years. It thinks that Canopy will claim at least $14 billion of that market and potentially as much as $37 billion. With its significant stake in Canopy (and the option to gain majority control of the company), Constellation could be in a strong position to be a leader in the global marijuana market.

2. Liberty Health Sciences

Liberty Health Sciences isn’t as well known as Constellation Brands or Canopy Growth. But Liberty appears to have excellent growth prospects in the near future.

The company claims one of only 14 medical cannabis licenses in Florida. That might not seem like a big deal, but Florida should be on track to become the third-biggest marijuana market in the U.S. over the next few years. The medical marijuana market in the Sunshine State is projected to top $1.7 billion by 2022.

Liberty Health Sciences currently has a market share of around 15% in Florida. But the company is ramping up its production capacity and will have the largest growing facility in the state when completed early next year. In addition, Liberty is adding more dispensaries to its four already in operation. The company thinks these efforts will help boost its market share to around 25%.

The math looks really promising for Liberty Health Sciences. A 25% market share of a market that will soon top $1.7 billion equates to $425 million annually. Liberty’s current market cap is only around $325 million. The company also has plans to expand into other states where medical marijuana has been legalized, giving Liberty even more growth opportunities.

3. Origin House

You might not have heard of Origin House — and for good reason. Until a few days ago, its name was CannaRoyalty, and even before then it was something of an under-the-radar marijuana stock. The company’s previous name reflected its roots in royalty streaming in the cannabis industry. Now, though, it has a different focus.

Origin House operates five licensed cannabis distribution and manufacturing facilities in California. The company has a saying, “Win California, win the world.” There’s some truth in the statement. Even with the rapid expansion of the legal recreational marijuana market in Canada and medical marijuana markets in Europe, California will generate nearly one-fourth of all global marijuana sales in 2022.

Winning California shouldn’t be too hard for Origin House. It already ranks as the top cannabis distributor in the state. The company also markets several of its own brands of cannabis products. Origin House plans to introduce more of its own brands throughout the rest of 2018 and into 2019, said CEO Marc Lustig on a phone call.

The company appears to be on track for profitability next year. With strong growth prospects in California and in Canada thanks to its acquisition of vape retailer 180 Smoke, Origin House should generate revenue of around $325 million by 2020, according to investment analyst Beacon Securities. That’s pretty much what the company’s market cap is now, which means that this stock should have a lot of room to run.

A dose of caution

Everything is not sunshine and roses with Constellation Brands, Liberty Health Sciences, and Origin House, though.

Liberty Health Sciences and Origin House focus on the U.S. market. There’s a little detail about this market that investors shouldn’t overlook: Marijuana is still illegal at the federal level in the U.S. Although the chances of a significant crackdown on marijuana businesses don’t appear to be great at this point, it remains a possibility.

In addition, Constellation’s rationale for investing in Canopy Growth assumed that the U.S. marijuana market would open up in the not-too-distant future. If that doesn’t happen, Constellation’s growth prospects in the cannabis industry will be seriously curtailed.

Last but not least, the latest big pullback shows that even stocks with solid prospects can be sucked into the downward spiral. Don’t expect any of these three marijuana stocks to buck a major downturn in the broader market. And there could be some more melting to come with the market meltdown. 

But just as Godzilla usually meets his match near the end of the movie, the market will be eventually pacified as well. That should create an opportunity for Constellation Brands, Liberty Health Sciences, and Origin House to deliver — wait for it — monster returns.

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