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Canopy Growth Corporation (NYSE: CGC) and Constellation Brands (NYSE: STZ) are definitely united to the hip. They are associated with marketing projects for cannabis-infused beverages. Constellation owns 38% of Canopy, thanks to its $ 4 billion investment in August. But these are always different stocks.
Despite the sharp decline recorded over the last two weeks, Canopy's share price has still far exceeded 50% in 2018. On its side, Constellation has been falling since the beginning of the year. Which of these stocks is the best buy now?
Source of the image: Getty Images.
The case of canopy growth
Canopy Growth presents two main opportunities for growth. One is the recreational marijuana market in Canada. The other is the global market for marijuana for medical purposes.
You could argue that Canopy is better positioned than any other company in the Canadian market for recreational marijuana. The company has 4.3 million square feet of growing space, the production of which is currently allowed. Canopy plans to add an additional 1.3 million square feet to this total.
Perhaps more importantly, Canopy has places to ship the cannabis it produces. The company has signed supply agreements with all provinces that have finalized their procurement plans. And these agreements are not for lousy volumes. Canopy transactions accounted for 36% of the total volume of all supply agreements between provinces and cannabis producers in August.
However, the company will have to wait a while before Constellation Brands can launch cannabis-based drinks. Canada will not finalize the regulation of several types of cannabis-based products, including edible products and beverages, until next year at the earliest.
Canopy is also present in the international marijuana markets for medical purposes. The company's Spectrum subsidiary operates in Germany, the largest 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 have already legalized marijuana for medical purposes or could do so soon.
It's hard to exaggerate the importance of Canopy's relationship with Constellation – and the money Canopy draws from it. Canopy has a lot of money to make strategic acquisitions giving it an even bigger head start over its competitors. In the long run, Canopy's potential market could reach $ 100 billion or more. Canopy appears to be a major player in this market and could generate strong returns for investors.
The case of Constellation Brands
To some extent, all the positive elements of Canopy Growth also apply to Constellation Brands. This is to be expected because Constellation has a big share of Canopy. However, Constellation's core business remains focused on alcoholic beverages.
At first glance, you might think that the alcohol industry is not going anywhere. For example, beer sales in the United States have been stable over the last 10 years. But the segments of high-end and craft beer are growing. Constellation's strategy is to dominate the high-end beer market in the United States.
The company is already a leader in premium beer manufacturers and the largest importer of beer in the United States. Overall, Constellation is positioned as the third largest beer producer in the United States with brands such as Corona, Modelo and Pacifico, Ballast Point craft beers, Funky Buddha and Four Corners. Constellation beers are the most popular among Hispanics, one of the fastest growing demographic data in the United States.
Although Constellation's strength lies in its beer business, the company is also targeting the growth of its wine and spirits business. And again, his strategy is to be the leader in the premium market, where growth is.
Constellation believes it can generate attractive returns from its wine and spirits business, with leading brands such as Kim Crawford and Black Box leading the way. The company also sees opportunities for strategic acquisitions to fuel growth, a field in which it has proven itself.
As the company generates significant profits and cash flow, it has not forgotten its shareholders. Constellation pays a dividend that currently earns 1.35%. With a very low payout ratio, the company should be able to increase its dividend in the future.
Better buy
Canopy Growth has more leeway than Constellation in the long run. Indeed, the cannabis market is still in its infancy while the market for alcoholic beverages is mature. Is Canopy the best choice? Yes and no.
My point of view is that Canopy is the best choice for aggressive investors. There is still a lot of risk for the cannabis industry. The assessment of Canopy reflects the expectations of extraordinary growth that could take longer than much hope. But over time, I think Canopy Growth will continue to be a big winner.
For more conservative investors, Constellation Brands is the smart choice. Constellation is in great shape financially. Its strategy is solid to generate sustained growth. And he has an option to buy Canopy, which, I guess, will come sooner or later.
The purchase of Constellation shares allows investors to hold a stake in a strong company and take advantage of the potential for global marijuana sales expansion. It's a win-win.
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